In a decisive move to curb inflation and stabilise the economy, the Central Bank of Nigeria (CBN) has dramatically increased the monetary policy rate (MPR) by 400 basis points, setting it at an unprecedented 22.75%. 

    This adjustment marks a significant departure from the previous rate of 18.75%, maintained since the Monetary Policy Committee’s (MPC) last convening on July 24th and 25th, 2023. 

    The decision announced by the CBN governor, Yemi Cardoso, propels the MPR to its highest point ever, underscoring the CBN’s aggressive stance on monetary tightening in response to economic pressures. 

    Further amplifying its tightening measures, the apex financial institution has also escalated the Cash Reserve Ratio (CRR) to 45%, a substantial leap from the prior 32.5%, while holding the liquidity ratio steady at 30%. 

    During a briefing that followed the two-day MPC meeting in Abuja, Mr. Cardoso detailed the committee’s unanimous resolution to not only elevate the MPR but also to modify the asymmetric corridor around it to a range of +100 to -700 basis points, departing from the former span of +100 to -300 basis points. 

    He said: 

    • All 12 members of the committee decided to further tighten monetary policy by raising the MPR by 400 basis points to 22.75% from 18.75%. Adjust the asymmetric corridor around the MPR to +100 to -700 from plus 100 to -300 basis points.
    • “The committee also raised the cash reserve ratio from 32.5% to 45% while retaining the liquidity ratio at 30%.” 
      This strategic adjustment by the CBN is a clear signal of its commitment to rein in inflationary pressures and foster a stable economic environment. 

    The increase in the MPR and CRR, accompanied by the retention of the liquidity ratio, reflects a calculated approach to managing the money supply and controlling price stability, critical components for the nation’s economic health. 

     

     

    Reason for hike

    The CBN governor explained the reason for the monetary authority’s decision to increase the MPR and other key financial parameters significantly. 

    He pointed out that the committee’s resolution was primarily influenced by the urgent need to address the ongoing inflationary pressures, the volatility in the exchange rate, and the anticipation of further inflation coupled with rising inflation expectations. 

    Cardoso highlighted the MPC’s deep concerns over the unrelenting surge in inflation rates, underscoring the committee’s strong resolve to mitigate this trend. 

    Further elucidating the reasoning behind the hawkish policy stance, Cardoso conveyed that the MPC members were alarmed by the continuous escalation of inflation levels and were determined to curb this adverse trend, as the equilibrium of risks was heavily tilted towards escalating inflation. 

    The CBN’s strategic move also reflects a broader understanding of the intricate balance between fostering economic growth and controlling inflation. 

    The committee acknowledged the potential trade-offs involved but remained convinced that sustainable economic expansion could only be achieved within a framework of low and stable inflation. 

    Emphasising a long-term strategy, the MPC underscored the transition to an inflation-targeting framework as a critical measure to combat persistent inflationary pressures effectively. This approach aims to ensure price stability, which is deemed essential for economic health and growth. 

    The committee also praised the fiscal authorities for their support, which is viewed as invaluable in these efforts to stabilise the economy. 

    The CBN governor said: 

    • “The committee, however, acknowledge the trade-off between the pursuit of output growth and taming inflation, but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation.
    • “Members noted the decision to transit to an inflation-targeting framework as essential to addressing the persistence of inflationary pressures in the economy, and commended the fiscal authority for their invaluable support.” 

     

    Previous hikes slowed inflation

    The CBN governor further spoke on the effectiveness of prior monetary policy adjustments, particularly the hikes in the policy rate, and their impact on the nation’s inflation trajectory. 

    He said: “Previous policy rate hikes have slowed the rise in inflationary pressure but not to a desirable extent.”  
    He added: “Members considered various scenarios of hold and hike and concluded that inflation could pose more persistent in the medium term and thus pose more regulatory challenges if not effectively anchored. The balance of the argument, thus, lead convincingly in favour of a significant policy rate hike to drive down inflation substantially.” 

     

    More Insights

    • The CBN has consistently and proactively addressed the country’s inflationary pressures through a series of monetary policy adjustments. Since May 2022, the CBN has embarked on a strategic path of tightening and elevating the MPR from 11.5% to 18.75% by July 2023. This series of rate hikes was in response to escalating inflation levels, signalling the central bank’s resolve to combat inflationary pressures and stabilise the economy.
    • The rationale behind these incremental increases in the MPR was grounded in the CBN’s observation of rising headline inflation, which necessitated tightening monetary policy to temper inflationary expectations and curb the inflation trend.
    • Despite these measures, the persistent inflationary trend presents ongoing economic challenges, underlining the complexity of achieving price stability in the face of various domestic and global economic pressures.
    • The backdrop of these monetary policy decisions includes a notable perspective from President Bola Tinubu, who has advocated for lower interest rates to stimulate investment and consumer spending, thereby fostering economic growth. This viewpoint underscores a broader debate on balancing stimulating economic activity and controlling inflation through monetary policy tools.
    • In a significant move at its first Monetary Policy Committee (MPC) meeting of 2024, the CBN opted to continue with its tightening approach, further raising the MPR. This decision is aligned to curb the historic high broad money supply, which stood at N93.72 trillion as of January 2024, alongside a staggering inflation rate of 29.9%. The central bank’s strategy aims to address these critical economic indicators, with the tightening measures expected to mitigate the inflationary pressures building up within the economy.
    • The CBN’s commitment to tightening monetary policy, as evidenced by the recent MPR hike, reflects a strategic choice to prioritise inflation control in the face of significant economic challenges.

     

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