In consideration of the galloping global and local inflationary levels, the Monetary Policy Committee of the Central Bank of Nigeria, on Tuesday, raised the benchmark interest rate from 14 to 15.5 percent.
This represents a 150-basis-point increase from the 14 percent rate voted during the last MPC meeting in July.
This is the third time the apex bank would be raising the Monetary Policy Rate, which is the same as the benchmark interest rate, in five months.
The MPC had raised the rate from 11.5 to 13 per cent in May, and further to 14 per cent in July, before increasing it to 15.5 per cent in a latest blow on cash-strapped Nigerian business, especially small and medium enterprises.
At the end of the MPC meeting, CBN Governor, Godwin Emefiele, told journalists that 10 members voted in favour of the rate hike.
The cash reserve ratio (CRR), which means the share of a bank’s total customer deposit kept with the central bank as cash, was also raised to 32.5 percent, from 27.5 percent since July.
Emefiele announced these decisions after the MPC meeting, saying that members were concerned with the continued aggressive movement in inflation, “even after the rate hike at its meeting in May and July 2022, and expressed an unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.”
“We will keep increasing the interest rate to reduce the high effect of inflation,” Emefiele said, noting that “the tested monetary policy theory is that the easiest way to tame inflationary pressure is to raise rates.”
He explained that the MPC was of the view that with the aggressive policy normalisation of the economies, losing the policy stance could hurt the economy.
“CBN research study has shown that once inflation trends above 12.5 or 13 per cent, it will retard growth. So, it is difficult for us, with all data available, not to go in a very aggressive way. To some, this is not expected because it increases the cost of borrowing, but this is the best we can.”
“At this meeting, the option of reducing the policy rate was not considered as this would be gravely detrimental to reigning in inflation. The committee thus agreed unanimously to raise the policy rate to narrow the interest rate gap and rein in inflation. The committee thus voted unanimously to raise the MPR.”
CBN to mop up liquidity
Emefiele further said that the CBN would implement aggressive cash reserve requirement measures to mop up excess liquidity from commercial banks by Thursday.
He cautioned banks to fund their accounts immediately, warning that lenders which failed to fund their bank accounts would be denied access to the foreign exchange market.
Experts believe that the measure is meant to tame inflation and arrest the currency crisis.
Naira exchanged at N718/$ on Tuesday at the parallel market and has hovered between N420/$ and N435/$ at the NAFEX window in the last one month.
CBN not compelled to fund airlines
The governor further said the CBN was not compelled by any law to provide dollars to airlines.
He said the CBN was determined to clear the foreign exchange backlog owed to airlines as long as their banks were fully funded, noting, however, that it was not the CBN’s responsibility to provide dollars to foreign airlines.
Emefiele said the bilateral air service agreements “did not say that you have to repatriate all of your dollars through the central bank. There is no law that makes it compulsory for you to purchase dollars from the Central Bank.”
It’s a panic measure – NACCIMA, others
The Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, Olusola Obadimu, described the rate hike as “a panic measure.”
“It is a pure panic measure. They might think that by raising interest rates, investors would be attracted to remain and others to come in and invest.
“However, an economy such as ours that is heavily import-dependent, experiencing stagflation and risking recession would not likely stand a chance.”