Thursday, March 28, 2024

CBN hikes rate to highest level to head off inflation

BY BAMIDELE FAMOOFO

In line with the global trend of increasing lending rates to curb inflation in most advanced economies of the world, the Monetary Policy Committee of the Central Bank of Nigeria on Tuesday raised the Monetary Policy Rate by 150 basis points.

As a result of the decision taken by 10 members of the MPC after its September bi-monthly, MPR now stands at 15.5 percent.

Cash Reserve Ratio was also increased by 500 basis points to 32.5 percent while Liquidity Ratio was retained at 30.0 percent.

According to a communiqué issued after the meeting, MPC was concerned that within a four-month period, inflation had accelerated aggressively by 280 basis points from 17.71 per cent in May 2022 to 20.52 per cent in August 2022. The Committee was thus of the view that given the primacy of its price and monetary stability mandate, it was expedient that significant focus must be given to taming inflation.

The Committee was of the view that a hold or loosen option was not in consideration at this meeting.

“This is also because a loosening will further widen the negative real interest rate gap and worsen the financial market conditions, as savings mobilization and investment inflows would decline further. It was also of the view that with the aggressive policy normalization in Advance economies, loosening the stance of policy would result in a sharp depreciation of exchange rate, leading to further hike in capital outflows.”

As regards a hold decision, this would mean a continuous deterioration in real earnings of fixed income earners and the livelihood of middle- and low-income households.

The MPC noted that a tight policy stance would help consolidate the impact of the last two policy rate hikes, which is already reflecting in the slowing growth rate of money supply in the economy. It also felt that an aggressive rate hike would slow capital outflows and likely attract capital inflows and appreciate the naira.

Members deliberated on the impact of the widening margin between the current policy rate of 14 per cent and the inflation rate of 20.52 per cent.

“At this Meeting, the option to loosen the policy rate was not considered as this would be gravely detrimental to reining-in inflation.

The Committee thus, agreed unanimously to raise the policy rate to narrow the negative real interest rate gap and rein-in inflation,” it stated.

The Committee thus voted unanimously to raise the Monetary Policy Rate and the Cash Reserve Requirement. Ten members voted to raise the MPR by 150 basis points, one member by 100 basis points, and another member by 50 basis points. Ten Members voted to increase the CRR by 500 basis points, while two members voted to increase CRR by 750 basis points.

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