- The Monetary Policy Committee of the Central Bank of Nigeria raised the interest rate by 50bps to 27.25%
- CBN governor says the bank will be fully disengaged from unorthodox methods of running a central bank
- Economists and businesses say interest rate hike is detrimental to economic growth, business operations and investments
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) Monetary has again increased the Monetary Policy Rate (MPR) by 50 basis points to 27.25 per cent from 26.75 per cent in July despite a slowdown in the inflation rate.
The CBN Governor, Olayemi Cardoso, who announced this after the 297th meeting of the MPC on Tuesday, September 24, said the decision to raise the MPR was taken to consolidate on the gains achieved on taming inflation.
The committee also decided to retain the asymmetric corridor around the MPR at +500/-100 basis points, raised the Cash Reserve Ratio (CRR) of Deposit Money Banks by 500 basis points to 50.00 per cent from 45.00 per cent in July and that of Merchant Banks by 200 basis points to 16 per cent from 14 per cent, while retaining the Liquidity Ratio (LR) at 30.00 per cent.
Recall that TheRadar reported that the committee’s stance on the interest rate, the CRR and other policies were part of the expectations ahead of the MPC’s meeting.
Also, the CBN had said it would maintain its monetary tightening stance until there was a reduction in the inflation rate.
Cardoso noted that though headline inflation has slowed down in two consecutive months, core inflation remained elevated due to energy prices, necessitating the committee’s decision to tame the persistent inflationary pressures.
He said, “The committee noted the moderation in headline inflation year-on-year in July and August 2024. In addition, the MPC noted the relative stability and convergence in the exchange rate across the various market segments, resulting from the bank’s tight monetary policy stance. This is expected to improve confidence which will enable economic agents to plan in the medium to long term.
“The committee was, however, unanimous in recognising that a lot more is required to actualise the bank’s price stability mandate. The MPC noted that even though headline inflation trended downwards due to a moderation in food inflation, core inflation has remained elevated, driven primarily by rising energy prices. The uptrend poses severe concerns to members, as it clearly indicates the persistence of inflationary pressures.
“Members thus, reiterated the need to work in close collaboration with the fiscal authority to address the current upward pressure on energy prices. The MPC noted the continued growth in money supply, recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.
“Members were also concerned about the growing level of fiscal deficit but acknowledged the commitment of the fiscal authority not to resort to monetary financing through Ways & Means.
“Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impact on the exchange rate. The committee, therefore, agreed to increase monitoring of future releases with a view to addressing its effects on price developments.”
‘CBN to be fully disengaged from unorthodox means of running central banks’
Cardoso also noted that the policies of the apex bank are geared towards restoring credibility in the bank and taking it fully from unorthodox means of running central banks.
He added that within his one year in office, the CBN has recorded a positive rating compared to before from rating agencies.
He said, “In the process of doing all these things we have done, we decided it was important to refocus the mandate of the central bank to orthodoxy. We are fully engaged in getting ourselves out of unorthodox means of running the central bank.
“It is all part of focusing on a core mandate, which essentially will moderate prices, as we have begun to see the results and will eventually result in price discovery on the foreign exchange side; these are all linked in together, you cannot take one without the other and I must say that a year later, I am very pleased to note that the rating agencies, for example, have given us a more positive rating than when we came in and that in itself, as far as I can see, speaks volumes.”
‘Interest rate hike doesn’t bode well for businesses, economy’
Reacting to the interest rate increase by the MPC, businesses, economists and analysts say the new rate is detrimental to investment, economic growth and business operations.
In a statement, the National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Dele Kelvin Oye, said the decision will further burden businesses with higher loan costs and has failed to curb inflation or stabilise the naira.
The statement reads, “As president of NACCIMA, I express concern over the CBN’s recent monetary policy rate hike to 27.25 per cent. This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.
“We urge the CBN to engage with stakeholders for a collaborative approach, considering alternatives like targeted sector support, deficit reduction and promoting local production.
“A reassessment of strategies is essential to ensure effective economic management and sustainable growth in Nigeria. Dialogue and innovative solutions are crucial for repositioning our economy.
“The increase is 50bps. It is not a material change. The narrative is actually the trend upwards. This is a confirmation that the previous high interest rate has not worked.”
On its part, the Centre for the Promotion of Private Enterprise (CPPE) said the decision will further exacerbate the already harsh operating environment for businesses and discourage investments in the country
The centre stated this in a statement by its Director/CEO, Dr Muda Yusuf, on Tuesday, September 24.
The statement reads, “It is quite troubling that at a time when manufacturers, entrepreneurs and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy.
“The latest policy choice of the apex bank is at variance with the mood of most economic players and the desire to promote economic recovery and growth.
“What manufacturers and other investors need at this time is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation.
“MPR at 27.25 per cent, CRR at 50 per cent and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”
The CPPE added that the rate increase is tantamount to making private sector operators pay the price for liquidity growth, urging the CBN to explore other measures of addressing the issue.
It said, “The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35 per cent or more. It is made worse by the increase in CRR to 50 per cent and retention of asymmetric corridor of +500 and -100.
“We believe that the policy decisions of the CBN are most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country.
“The operating and production costs of businesses would be further exacerbated by the latest monetary policy tightening. The increase in CRR to 50 per cent would constrain financial intermediation with negative consequences for the banking system and the economy.”
Beyond increasing MPR, how else can CBN tame inflation?
Meanwhile, TheRadar reported that at its 296th Monetary Policy Committee (MPC) meeting, the Central Bank of Nigeria (CBN) increased the Monetary Policy Rate (MPR) by 50 basis points to 26.75 per cent from the May rate of 26.25 per cent to tame inflation.
TheRadar highlighted other ways the apex bank can tackle inflation beyond increasing interest rates, which some Nigerians describe as ‘textbook economics.’
