In Unprecedented Offensive To Tame Inflation, CBN Raises Interest Rate To 22.75% From 18.75%

In one of its most audacious responses to the ravaging inflation in the country, the Central Bank of Nigeria (CBN) on Tuesday raised the Monetary Policy Rate (MPR), the benchmark interest rate, by 400 basis points to 22.75 percent, from 18.75 percent.

The bank also adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points.

The central bank equally raised its Cash Reserve Requirement (CRR) to 45 percent, from 32.5 percent, and retained the Liquidity Ratio at 30 percent.

The CBN governor, Olayemi Cardoso, disclosed the changes while addressing journalists at the end of the two-day meeting of the Monetary Policy Committee (MPC) – the first under the reconstituted committee led by Cardoso.

The magnitude of the rate hike beat the expectations of many analysts, who, though predicated further tightening of monetary policy, believed it would be in the region of between 200 and 250 basis points to tame headline inflation, which stood at 29.90 percent in January.

The MPR is the rate at which commercial banks borrow from the apex bank and often determines the cost of funds in the economy.

The significant policy rate hike seeks to drive down inflationary pressure substantially, according to the CBN governor.

Cardoso also revealed on Tuesday that the central bank had further disbursed $400 million to settle part of the outstanding foreign exchange (FX) commitments, which had been verified to be genuine requests.

He justified CBN’s recent clampdown on cryptocurrency platforms, particularly Binance, which allowed its platform for speculative activities against the naira.

Cardoso said unidentified beneficiaries accessed $26 billion on the Binance platform in 2023, with all the attendant implications for monetary policy, especially the tendency to stoke inflation and further weaken the naira.

He said there were indications of illicit inflows and suspicious transactions, adding that the CBN has the responsibility to protect Nigerians from the disruptive activities of such crypto platforms.

Cardoso, who read the committee’s communique, stated that decisions were centred on the current inflationary and exchange rate pressures, projected inflation, as well as rising inflation expectations. He said members acknowledged the trade-off between the pursuit of output growth and taming inflation, but were convinced that an enduring output expansion was possible only in an environment of low and stable inflation.

The CBN governor said the MPC acknowledged the decision to transition to an inflation-targeting framework as essential to addressing the persistence of inflationary pressures in the economy and commended the fiscal authorities for their support.

He explained that the options available were to either hold or hike the policy rate to offset the persisting inflationary pressure. He said considering the option of a hold policy, the evidence revealed that previous policy rate hikes had slowed the rise in inflationary pressure but not to a desirable extent.

Cardoso said members considered various scenarios of hold and hike and concluded that inflation could become more persistent in the medium-term and, thus, pose more regulatory challenges if not effectively anchored.

He said the MPC also deliberated extensively on various distortions in the foreign exchange market, including the activities of speculators, putting upward pressure on FX with high pass-through to inflation.

According to him, “Members were, however, convinced that the ongoing reforms in the foreign exchange market would yield the desired outcome in the short to medium term.

“The reforms include the unification of the FX market; promotion of a willing buyer-willing seller market; removal of all limits on margins for IMTO remittances; introduction of a two-way quote system and the broad reforms in the BDC segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market (NAFEM).”

He disclosed that the country’s gross external reserves stood at $34.51 billion on February 20, 2024, compared with $32.23 billion at end-January 2024.

Cardoso attributed the improvement to reforms in the foreign exchange market and an increase in oil production, among others.

He said, “Firstly, I hope you can see from the decision that has been announced concerning our policy stance and monetary policy rate that clearly, we are out to tighten the money supply and to ensure that we have a robust structure in place as far as monetary tools are concerned to rein in inflation.

“We expect that this would moderate in the short to medium term, but interestingly, we also appreciate the fact that there is a structure side to inflation, which we intend to work very closely with other arms of governments, in particular, the fiscal side.”

Cardoso added, “We hope to collaborate very strongly with the fiscal side so that the other elements of inflation that are not directly within our control to be managed a lot better and a more positive outcome will come to the benefit of all Nigerians.”

On Binance, Cardoso said, “We are concerned that certain practices go on that indicate illicit flows going through a number of these entities and suspicious flows.

“In the case of Binance, last year alone, $26 billion passed through Binance Nigeria from sources and users who we cannot adequately identify.

“There is a lot that is going on now as a result of collaboration between the different agencies, which include the EFCC and the police, and, of course, the Office of the National Security Adviser and in due course, as we progress and have more information to share, we will certainly share but suffice to say that we are determined to do everything it takes to ensure that we take charge of our market and not allow others to manipulate our markets in a way that ends up distortionary.

“We will not accept it. And we will do everything possible to prevent any of these kinds of infractions from taking place.”

On the question of the naira being currently undervalued, Cardoso explained, “The naira is undervalued and some will say it is rather a bold statement from a central bank governor. From my perspective, there is a technical side and the CBN on a continuous basis does its internal calculations and then there is the softer side.

“As far as I can see, the softer side resolves in some of the things I had mentioned earlier and that is a distortion to the extent that a market is not functioning effectively and is distortionary in outcome; my view is that it certainly cannot be what it is.

“For me, it was a challenge to ensure that we remove those distortions.

“Some of the distortions we are seeing and some of the manipulations that are taking place, we are investigating right now.

“When distortions come, we will take them out and throw them away and where there are distortions that come about by bad behaviour, we will ensure that those who do it will face the music as a deterrent to ensure that others in future do not go that route.”

Cardoso also spoke on the suggestions that the economy was suffering on account of the various reforms introduced by the apex bank, and was quick to absolve the current CBN management team from blame.

He said, “As central bank governor, I and my team are not responsible for the woes we have today. We are part of the solution. We are determined to ensure that we work hard to get out of the mess Nigeria is in.

“We assumed responsibility in a time of crisis of confidence and you may all want to go to bed and wish that the crisis of confidence was not there, but it was.

“All we can do is do the difficult things to make a bad situation better and I do believe that the efforts that we are making are beginning to bring back confidence.

“Without confidence, we are not going to get very far. No matter how much you have in your store of dollars, naira, if the confidence is not there, all that money will disappear in no time. We are working hard, putting out policies, trying to avoid as much as possible to not go against the grain and the spirit of what we said we would do.”

He added, “We are trying to be as open as possible. We are bearing the interest of all Nigerians in view of any decisions we are taking. We are ensuring that we put the country above individuals.

“Nigeria does not have room to make failed interventions. We do not have the wiggle room to get it wrong. We are not magical, if we have made mistakes, we would be humble enough to say we have made mistakes and change course.

“But we will do everything possible to conduct business recognising that we are in a position of trust and we will not betray that trust. I am not on the fiscal side, and we were fortunate that in the process of having the MPC, we have very senior representation of the fiscal and hopefully should help on the handshake.”

The CBN governor also stated, “From the perspective of the CBN, hard decisions have been taken and since the CBN can’t do it alone, we have to work together. We see a lot of the reforms on the fiscal side helping to create a better environment for Nigeria.

“Nigerians must understand and see where the future is going. Tax to GDP of 7.1 percent is one of the lowest. The recommendation for proper development is in the region of 30 upwards.”

However, reacting to the outcome of the MPC meeting, the Centre for the Promotion of Private Enterprise (CPPE), on Tuesday, declared that raising the MPR from 18.75 percent to 22.75 percent would hurt the real sector of the economy, which was already contending with numerous macroeconomic challenges.

An economist and Chief Executive Officer of CPPE, Dr. Muda Yusuf, also said the increases in MPR as well as the CRR from 32.5 percent to 45 percent would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy, because the increases were quite significant.

Yusuf said, “The new dramatic increase in MPR to 22.5 percent hike means that the cost of credit to the few private sector firms that have exposure to bank credits will increase, which will impact their operating costs, prices of their products, and profit margins, amidst very challenging operating conditions. The equities market may also be adversely impacted by the hike.”

Yusuf added that the decisions of the MPC, which were consistent with the typical policy response of the central banks globally, failed to reckon with domestic peculiarities of the Nigerian economy.

According to him, the key drivers of Nigeria’s inflation are largely supply-side variables, and the CBN ways and means financing.

The CPPE chief executive stated, “Over the last two years, there had been persistent monetary policy tightening, yet there has not been any significant impact on the inflationary pressures. If anything, the general price level had been continuously on the increase.

“We recognise that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective. Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, global supply chain disruptions and the surge in ways and means finance. The hike in MPR or CRR would not change these variables.

“Already, bank lending has been constrained by the high CRR, which was until the latest review, 32.5 percent, although many operators in the sector claim that effective CRR is as high as 50 percent for many banks via the discretionary debits by the apex bank.

“The credit situation in the economy is already very tight, with lending rate ranging between 25 and 30 percent. The Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors.”

Yusuf added, “The Nigerian economy is not a credit driven economy, unlike what obtains in many advanced economies, which have much higher levels of financial inclusion, robust consumer credit framework, and strong correlation between interest rate and aggregate demand. 

“Bank credit to private sector as a percentage of GDP was 14 percent in 2022 in Nigeria. It was 59 percent in South Africa, 30.9 percent in Egypt, 30 percent in Botswana, 51.6 percent in the United States and 130 percent in the United Kingdom. These underscore the variabilities across economies; thus, policy responses have to be different.

“The transmission effects of monetary policy on the Nigerian economy are still very weak. In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.”  

 James Emejo, Nume Ekeghe and Dike Onwuamaeze

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