In a move that sent shockwaves through the financial markets, the Central Bank of Nigeria (CBN) on Tuesday announced a significant increase in its Monetary Policy Rate (MPR). The rate was raised by 50 basis points, bringing the benchmark interest rate to a staggering 27.25%. This marks the fifth consecutive rate hike in 2024, underscoring the CBN’s unwavering commitment to combating rising inflation.
Following a two-day Monetary Policy Committee (MPC) meeting in Abuja, CBN Governor Olayemi Cardoso revealed the unanimous decision by the 11 committee members to tighten monetary policy. The move is aimed at curbing inflationary pressures, even as there are signs of a recent slowdown in price growth.
In addition to the rate hike, the CBN also took other measures to tighten liquidity in the economy. The Cash Reserve Ratio (CRR) of commercial banks was increased by 500 basis points from 45% to 50%, while that of merchant banks was raised by 200 basis points to 16%. Furthermore, the asymmetric corridor around the MPR was widened to +500 and –100 basis points, while the liquidity ratio was maintained at 30%.
Governor Cardoso emphasized that the decision to further tighten monetary policy was a unanimous one among MPC members, reflecting the urgency of addressing the inflationary challenges facing the country.
Inflationary Pressures and Foreign Exchange Stability
The CBN cited several factors as driving its decision to raise interest rates. The apex bank highlighted the threats posed by food inflation, flooding in many parts of the country, rising petrol and energy prices, and the need to maintain foreign exchange stability.
The recent 50 basis points hike in the MPR brings the cumulative increase under Governor Cardoso’s leadership to 850 basis points. This continues a trend of aggressive monetary tightening that began in May 2022.
Analysts had anticipated that the CBN might adopt a slightly more dovish stance on interest rates, given the two consecutive months of slowdown in inflation during July and August. Nigeria’s inflation rate in July decreased to 33.4% from 34.19% in June 2024, and further eased to 32.2% in August.
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However, there are concerns that the recent deceleration in inflation may be short-lived. The scarcity of petrol and subsequent price increases by the Nigerian National Petroleum Company Limited (NNPCL) could push inflation back up.
Attracting Foreign Portfolio Investment
The decision to increase interest rates also reflects the CBN’s desire to attract Foreign Portfolio Investment (FPIs) into the country. While the United States Federal Reserve cut rates earlier this month, Nigeria’s higher interest rates could make its assets more appealing to foreign investors seeking higher returns.
If You Ask Me
The CBN’s aggressive monetary policy stance has drawn mixed reactions from various stakeholders. While some argue that it is necessary to curb inflation and stabilize the economy, others express concerns about the potential negative impact on economic growth and job creation.
The CBN’s decision to raise interest rates is a significant development with far-reaching implications for the Nigerian economy. It remains to be seen whether the move will be effective in the long term to curbing inflation, attracting foreign investment, and promoting sustainable economic growth. As the situation evolves, it will be crucial to monitor the impact of the rate hike on various sectors of the economy and the welfare of the Nigerian people.
