The Central Bank of Nigeria, CBN, yesterday raised its benchmark interest rate, the Monetary Policy Rate, MPR, again, to 18.75 per cent in a bid to curb inflation.
The MPR is the benchmark for interest rates in the economy.
Meanwhile, the CBN has assured that it will continue to intervene in the foreign exchange, forex market to ensure stable exchange rate, adding that the ongoing volatility in the official market, though expected, will moderate soon.
The annual inflation rate rose for the 19th consecutive months to 22.79 per cent in June, the highest in 17 years, reflecting continued increase in prices of goods and services across the country.
Consequently, the CBN at the end of its Monetary Policy Committee, MPC meeting, yesterday, raised the MPR, for the seventh consecutive time since April 2022, to 18.75 per cent, representing a 25 basis points increase from the previous level of 18.50 per cent.
Though the CBN at the end of the meeting retained the Cash Reserve Ratio, CRR and Liquidity Ratio at 32.5 per cent and 30 per cent respectively, it however narrowed the asymmetric corridor around the MPR to +100/-300 from +100/-700 basis points.
Acting Governor CBN, Mr. Ade Shonubi disclosed this in a communiqué while addressing the press at the end of the MPC meeting in Abuja yesterday.
Decision to hike rate to 18.75%
Explaining the rationale for raising the MPR to 18.75 per cent, Shonubi said: “Considering the option to a hold, the Committee reviewed the impact of the continued rise in inflation on various macroeconomic variables, noting the potential dampening effect on output growth.
“Members agreed unanimously that the previous series of rate hikes had indeed greatly moderated the pace of price development and was gradually but steadily yielding the expected outcome.
The option to continue to hike the policy rate, albeit moderately, also presents a strong alternative. This is premised on the expected liquidity injections into the economy, from the recent policy developments and the likely impact on inflation.
The Committee remained cautious in arriving at a policy decision as members noted the need to continue to support investment which will ultimately lead to the recovery of output growth.
“The balance of these arguments thus, leaned in favour of a moderate rate hike, to sustain efforts at anchoring inflation expectation, narrow the negative real interest rate gap, and improve investor confidence.
“In summary, the MPC voted to: Raise the MPR by 25 basis points, from 18.50 to 18.75 per cent; Adjust the asymmetric corridor to +100/-300 basis points around the MPR from the previous corridor of +100/-700 basis points around the MPR; Retain the CRR at 32.5 per cent; and Retain the Liquidity Ratio at 30 per cent.”
Rate hikes moderating inflation
Responding to concerns that previous rate hikes had not been effective in taming the inflation rate, Shonubi said: “There has been quite a lot of difference. The result of past MPCs shows that every time we had a rate increase, it actually helped in moderating the inflation.
“During this MPC meeting, we had a lot of time talking about inflation, talking about the different tools in managing inflation.
“One of the key challenges now is the liquidity overhang and we need to look at the various tools available to deal with it.
“As a matter of fact, we made reference to that in the Communique.
“So in addition to interest rate hike, we have also come up with various ways to fight the liquidity because we believe that the liquidity surfeit runs, not just across inflation, also but on exchange rate and other parts of the economy.
“I can confirm that it’s not only rate change that we are looking at to moderate inflation. We are looking at every tool in the box and we are confident it will have a positive impact on reining in inflation. “
FX Rate volatility
Addressing concerns over the ongoing exchange rate volatility in the official forex market, represented by the Investors & Exporters, I&E window, the Acting CBN Governor said: “We are not trying to unify any rate. We believe that we need to encourage the market to be more efficient and be more effective and that is a bit of time. Some of the volatility you have seen over the period were driven by that same fact, that the market needs to to find its level and also the reality that there is pent up demand which the current supply may not be sufficient for.
“And as we ease and satisfy the pent up demand and we begin to see a more efficient market that runs. But you also need to understand the dynamics of pricing in the market.
“So we expect that overtime, sooner rather than later the volatility you are seeing will normalise “The role of the CBN is to intervene and keep the market at a fairly stable level. We have our views as to what that level is and as the market continues to oscillate around that level if there is a need for us to either by buying or selling that is the role of the central bank. We have started intervening and we have been doing it for a while and we will continue to intervene to bring the market to the level that we believe it should be. Right now and in the short run these volatile times are expected but we expect them to moderate sooner rather than later.”