THE Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) meeting on Tuesday increased the Monetary policy rate (MPR) by 400 basis points to 22.75 per cent.
The MPC also directed commercial banks to ensure safety buffers in their monetary management preparatory to imminent recapitalisation.
The recapitalisation, the MPC members said, would ensure safer management of banks’ stress triggered by inflationary pressures.
Notably, the MPR, also known as lending rate, was raised to 22.75 from the previous 18.75 per cent.
The committee also adjusted the asymmetric corridor from +100 to -700 from the previous +100 to -300 basis points.
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The cash reserve ratio was raised from 32.50 per cent to 45.00 per cent, while the liquidity ratio was retained at 30 per cent.
The committee chaired by the CBN Governor, Olayemi Cardoso, who briefed the media said the decisions were influenced by the current inflationary and current exchange rate ratios, projected inflation, and rising inflation expectations.
Cardoso said the committee members were concerned about the persistent rise in the level of inflation and said the rates would continue to reverse the trend and the inflationary pressures on the economy.
He stressed that the committee acknowledged and further noted that stable growth and output were possible in an environment of slow and stable inflation.
He further said the overall decisions were geared towards taking persistent inflationary pressures.
FX reforms
Speaking on foreign exchange market distortions, the governor noted that despite the present difficulties, the unification policies of the CBN were already yielding the desired results.
He explained that the MPC members were convinced that the ongoing reforms in the foreign exchange market would further strengthen the market.
Banks’ stability and recapitalisation
The committee also reviewed the key indicators of the financial banking system and noted that the system remained stable.
To further ensure the stability of the banking system, the MPC called on the banks to increase system buffers and recapitalise the banks to tame potential risks.
Members enjoined the banks to strengthen surveillance regarding the earlier guidance on the foreign exchange revaluation gains.
The committee also identified non-monetary factors driving inflation such as the persistent infrastructural deficits and noted the roles of fiscal policy in addressing the shortfalls while reiterating the monetary policy support.
It further applauded the civil service reforms which are focused on running down the cost of governance, while also ensuring a lean and efficient civil service structure.
Experts observations
An emerging market and fixed income expert, Ajibola Osho, reacting to the development said the CBN was being cost-cautious, adding that the “cost of funds” from commercial banks would go up for the real sector.
“The real sector would take the heat further because lending rate will go up further and businesses would take the heat because the commercial banks would take their mark-up funds from the CBN rate. The whole market sentiments are bearish,” she said.
Also, a Commercio Partners Research on the MPC decision sent to The ICIR via email noted that “The decision to hike borrowing costs is exceeding market expectations of a hike between 175 basis points to 225 basis points. Also, the Nigerian fixed-income market has seen some pricing-in, as some of the debt instruments have seen increasing yields.
“Sticking to maintain a hawkish stance amidst the present socio-economic problems confronting the Nigerian economy is a tough but bold move by the CBN. This move reiterates the CBN’s commitment to maintain price stability in the country.
“It would have been expected that based on recent data such as inflation, unemployment, and GDP, showing signs of weaknesses in the economy, the CBN would have taken a more subtle approach in its fight against inflation.”
Further insights
At the last MPC meeting in July 2023, the committee voted and raised the benchmark rate by 25 basis points to 18.75 per cent, adjusted the asymmetric corridor around the MPR to +100-300, and retained the CRR at 32.5 per cent.
Nigeria’s economy has since then witnessed increasing inflationary pressure, worsening the country’s economy and prompting many analysts to call on the new CBN governor, Olayemi Cardoso, to make rational decisions to rescue and bolster the economy.
Nigeria faces a sharp depreciation of its currency – the naira, rising cost of goods and services, energy, transportation, and other socio-economic headwinds.
Cardoso took over the helm of affairs at the CBN in September 2023, following the suspension and subsequent resignation of the embattled CBN governor, Godwin Emefiele, who is facing litigation over the misappropriation of funds and other charges.
The MPC has not been held since he assumed office to take any rational decisions on inflation despite the increasing month-on-month inflation rate to 29.9 per cent as of January.
The ICIR had reported that the apex bank indefinitely postponed the by-monthly meeting in September, November 2023, and January 2024.
At every MPC meeting, the committee considers the social, political, and economic events on the global and domestic levels to arrive at its decision, which it uses as one of the monetary tools to control inflation.
The ICIR reports that the MPR started to rise from May 2022 as inflation and the rates tended to move in the same direction.
When inflation rises, analysts expect that the committee will vote to raise the benchmark rate and adjust the other parameters where necessary.
Checks by The ICIR show inflation and MPR have trended in the same direction since 2022.
In May 2022, the headline inflation rose to 17.71 per cent, and the MPC voted and raised the MPR to 13.00 per cent in that same month from 11.50 per cent.
At its meeting in July 2022, the MPC raised the benchmark rates to 14.00 per cent following a rise in inflation to 19.64 per cent that month. In September 2022, inflation rose to 20.77 per cent, and the committee also voted to raise the MPR to 15.50 per cent.
In November 2022, the committee raised the MPR to 16.50 per cent after inflation rose to 21.47 per cent, and in January 2023, the rate was 17.50 per cent as inflation throttled to 21.82 per cent.
Inflation increased to 22.04 per cent in March 2023, and the committee raised the MPR to 18.00 per cent at its March 2023 meeting. In May of that same year, the committee increased the rate to 18.50 per cent when inflation jumped to 22.41 per cent.
At its last MPC meeting in July 2023, the committee also raised the MPR to 18.75 to control the headline inflation, which climbed to 24.08 per cent. Since then, headline inflation has continued to grow, surging to 29.9 per cent as of January, according to the National Bureau of Statistics (NBS) latest report.
MPC, responsibilities, and decisions
The committee is the CBN’s highest policy-making body communicating policy direction to address major economic issues, such as inflation and benchmark interest rates.
It is also saddled with the responsibility to review economic and financial conditions in the economy, determine appropriate policy stance in the short to medium term, check the CBN monetary policy framework, and adopt changes when necessary.
After all the considerations, the committee members vote to adjust the MPR, CRR, asymmetric corridor around the MPR, and liquidity ratio.
The ICIR reported that in just seven months of President Bola Tinubu’s administration, inflation has risen by 749 bps to 29.9 per cent and food inflation by 1,059 bps to 35.41 per cent.
Tinubu removed fuel subsidy and unified the exchange rate, which had heated Nigeria’s fragile and volatile economy, pushing more Nigerians into acute poverty and creating hardships.
Analysts had told The ICIR that the committee would vote to raise rates as the factors influencing inflation were cost-push. As such, the CBN contractionary monetary policy would not avail, but the situation requires fiscal policy interventions.
The Nigeria Labour Congress (NLC) has today, Tuesday, February 27, started a two-day nationwide strike to compel the Federal government to address the hunger and hardships in the country.
