- Nigeria’s Central Bank’s Monetary Policy Committee has raised benchmark interest rates to 26.75% to tame inflation
- CBN governor, Olayemi Cardoso, reiterated the decision of the bank to take over funds in dormant accounts
- The interest rate hike means that banks will borrow from the CBN at an increased rate of 31.75%
Owing to intractable inflation, the Central Bank of Nigeria (CBN) has increased the Monetary Policy Rate (MPR) by 50 basis points to 26.75 per cent from the previous rate of 26.25 per cent.
The bank, however, retained the Cash Reserve Ratio (CRR) at 45 per cent for deposit money banks (DMBs), 14 per cent for merchant banks and retained the Liquidity Ratio (LR) at 30 per cent.
The decision was taken after the apex bank’s two-day 296th Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, July 23.
CBN governor, Olayemi Cardoso, who made the announcement, added that the MPC adjusted the asymmetric corridor around the MPR to +500/-100 from +100/-300 basis points.
Recall that TheRadar reported that increasing interest rates will be part of the decisions the MPC will take in addressing the country’s economic challenges.
Cardoso, who cited exchange rate convergence, capital importation, increased inflows and month-on-month reduction in inflation, among others, assured that the policies of the bank will revamp the economy.
He also said the committee considered the effect of rising prices on households and businesses in making the decisions on the MPR, noting that it was committed to adopting necessary measures to rein in inflation.
Cardoso said, “It is so important that we continue to bear in mind that our policies must ultimately impact the man on the street.
“Over a period of time, we have had an economy that failed to diversify. The Nigerian economy had depended on one source of revenue. A monolithic economy has its own risk. Part of it is what we are going through, though there are global headwinds.
“Going forward, we must ensure that we are able to craft policies that are sustainable with the long term in view. Such policies must take into consideration inclusiveness. The implementing process must be robust and that is where the institutions come in. They have to go hand-in-hand.
“In the short term, we might find that some of the policies being implemented may appear stringent, but I can assure you that in the medium and long run, definitely, they will put us on the path of sustainability.
“Our policies are beginning to cascade down bit by bit. They are moving in a relatively more positive trajectory.
“Two areas that pose a challenge are food inflation and foreign exchange. The MPC noticed the moves by the fiscal side taking certain policies that help to moderate food inflation and we are hopeful and encouraged.
“On the foreign exchange, we have seen positive outcomes from the tools that we have been using over the recent past. For example, exchange rate has converged, limiting the opportunities for arbitrage.
“Inflows have increased from $37.93 billion between January and May 2024 to $38.8 billion. Net inflows grew by 73.4 per cent in May 2024 compared to May 2023. Diaspora remittances at the end of June had gone up to $2.34 billion in comparison to $1.58 billion for the corresponding period last year. Capital importation between January and June was $5.92 billion, relative to $1.77 billion for the corresponding period last year.”
CBN reiterates dormant accounts takeover
At the MPC meeting, Cardoso also reiterated its earlier announcement of the takeover of dormant accounts, unclaimed balances and other financial assets that have remained dormant for at least 10 years.
He said the takeover is for the safekeeping of such funds to prevent activities of fraudsters, adding that the monies would be returned with accruable interest to owners whenever they so request.
“This particular directive concerns dormant accounts, not domiciliary accounts. Over the years, in my experience, what I found personally is that if you keep accounts dormant in banks, in fact, most times, they are more susceptible to fraudsters copying your identity and trying to game the system to grab hold of you.
“So, that is the problem that I think most of all in the human space. And I am sure if you have been on the scene like I have been, then you will know that anything that can protect you in the process from these kinds of predators will be welcome. The policy and the directive are meant to ensure that all those monies come to the Central Bank for safekeeping.
“You don’t lose your money and it is at zero cost to the beneficiary. All that will happen is that the Central Bank will manage the monies within our possession and when the rightful owner surfaces, the money is returned, plus whatever income is accrued to the bank. I think this should be a welcome development,” the CBN governor said.
‘We will continue to discuss with manufacturers on real sector impact of our policies’
In response to complaints by manufacturers and the Organised Private Sector (OPS) about the bank’s policies’ impact on the real sector output, Cardoso assured of continuous dialogue, stressing that the policies are necessary for long-term benefits.
He said, “We have had several different programmes with them, both in some cases individually and in many cases collectively. And it is something that we will continue to do to at least explain the reasons we are taking some of the measures we are taking. However, I think I’ve just seen one or two things.
“One is to understand that at least there some issues were discussed and I am sure it is having a major impact on the economy. Purchasing power is getting eroded. People are being pushed into different categories of poverty and it is in their interest that we can obtain this sort of inflation. If not, the ramifications will also be for them.
“We understand the need for growth and we also understand that it is relatively challenging when you have high interest rates.
“Quite frankly, I believe that it is so fundamental to the long-term future and stability of our economy that inflation should be brought under control, that in the short term, these are pains which ultimately will be able to help our economy and help the manufacturing.”
Cardoso assures of fiscal, monetary policy authorities’ collaboration
With the discordance seen in monetary and fiscal policies, the CBN governor assured that both authorities would work towards policy harmonisation and collaboration.
He said, “I will be very concerned if we find ourselves going in the opposite direction in terms of the different macroeconomic policies. Some of the other things – debts to GDP, tax to GDP – are all things that have been fixed on the fiscal side and we see the efforts that have been made, which both the fiscal and the monetary could have removed. I am convinced that behind any unforeseen circumstances and, in saying this, I must also say that CBN is extra vigilant.
“We will not go to sleep on our responsibilities. But to emphasise that the collaboration between the fiscal and the monetary side continuing in the way of strengthening the handshake across both sides is, I am confident, will take us to a much better place where the losing blocks will be there and the growth, which the organisers that you will rightly talk about, you will find they will have a solid foundation on which to grow the economy of this country.”
Banks will borrow from CBN at 31.75% with MPR increase
The increase in interest rate to 26.75 per cent has implications for banks as they will have to borrow money through CBN’s Standing Lending Facility (SLF) window at 31.75 per cent per annum instead of the previous 27.25 per cent.
Worried by the adjustment in the asymmetric corridor of the MPR, Professor Uchenna Uwaleke, Director, Institute of Capital Market Studies, Nasarawa State University Keffi, said this will further squeeze liquidity from the banking system and hike the cost of credit.
Professor Uwaleke wondered why the MPC masked liquidity tightening in the asymmetric corridor rather than the MPR.
He said, “The adjustment to the asymmetric corridor around the MPR is a major source of concern for me. The MPC communiqué did not provide any explanation for increasing the SLR from +100 to +500 and the SDR from -300 to -100.
“By implication, with an MPR of 26.75 per cent, banks will now get loans from the CBN at 31.75 per cent while they will be remunerated for their excess deposits at 25.75 per cent. This will further squeeze liquidity from the banking system and jerk up the cost of credit with adverse consequences on output and the equities market.
“The MPC communiqué should have made it clear why it was better to mask the tightening in the asymmetric corridor than reveal it in the MPR.”
Also, analysts at Afrinvest (West) Africa Limited said the adjustment will discourage banks from accessing liquidity through the SLF window, which has a negative pass-through effect on real sector players as they will battle with interest expenses on debt funding.
The analysts said, “Meanwhile, banks with excess liquidity willing to play at the Standing Deposit Facility (SDF) window would only receive 25.75 per cent interest per annum, thereby expanding the negative spread between SLF and SDF to 600 basis points (bps) from 400bps.
“Based on our assessment of industry data, banks tapped N73.6 trillion through the SLF window between January and July 2024, representing 8.5x the size of activities at the SDF window. We expect pressure to mount on banks’ ability to balance risk-return going forward.”
MPC expected to take tough policy decisions aimed at addressing economic challenges
Meanwhile, TheRadar reported that ahead of the decision of the Monetary Policy Committee (MPC) of the CBN, there are speculations of tough policy decisions before the committee due to the economic situation of the country.
These decisions border on the Monetary Policy Rate (interest rate), Cash Reserve Ratio (CRR) and other broad monetary policy options.
