July 23, (THEWILL) – The Central Bank of Nigeria (CBN) has further raised its benchmark interest rate by 50 basis points to 26.75 percent from 26.25 percent.
CBN Governor, Olayemi Cardoso, who disclosed this to journalists at the end of the 296th Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, said the decision is part of an aggressive attempt to tame the persistent rise in food inflation and the nation’s headline inflation rate currently at 34.19 percent.
While the apex bank adjusted the asymmetric corridor around the MPR to +500/-100 from +100/300 basis points, it, however, retained the Cash Reserve Ratio, CRR, for deposit money banks at 45 percent and Merchant Banks at 14 percent. The Liquidity Ratio was retained at 30 percent.
The benchmark interest rate, also called the monetary policy rate (MPR), determines the cost of borrowing in the economy. It can be considered the interest rate the CBN uses to lend to banks, who then lend to customers at a higher rate.
The CBN has since February 2024, hiked MPR by 750 basis points, making the cost of borrowing increased to about 26.25 percent.
Stakeholders had raised concerns and warned the CBN against further hikes in interest rates.
Earlier, the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), warned against the potential consequences of another MPR. National President of NACCIMA, Dele Oye, pointed out that while an increase in interest rate might help control inflation, it often resulted in higher costs and increased uncertainty, which could have a range of negative impacts on businesses and growth prospects.
Oye said further rate hikes would increase borrowing costs, lead to reduced investment, decreased consumer spending, impact on stock prices, cash flow challenges, inflation control, and long-term planning, among others.
Also cautioning the CBN against further hikes in interest rates, the Director of, the Institute of Capital Market Studies, Nasarawa State University, Keffi (NSUK), Professor Uche Uwaleke, noted that despite the aggressive hike in the MPR between February and May, “Headline inflation rose to 34.19 per cent year-on-year in June”.
He added, “Production is stifled because of the very high cost of funds. Moreover, the seeming overreliance on the MPR as a tool to tame inflation does not appear to be making any meaningful impact due to the significant non-monetary factors driving inflation in Nigeria, such as the high cost of energy, transport, as well as insecurity in the food-belt regions of the country.”
Similarly, Managing Director/Chief Executive, of Dignity Finance and Investment Limited, Chijioke Ekechukwu, said the previous hike in MPR was already stifling the economy.
However, Cardoso on Tuesday, expressed optimism that the various tools deployed by the bank to tame inflation and create a stable foreign exchange market would yield the needed results in the coming months.
According to the communique of the meeting signed by the apex bank Governor, “The Committee was mindful of the effect of rising prices on households and businesses and expressed its resolve to take necessary measures to bring inflation under control. It re-emphasized its commitment to the Bank’s price stability mandate and remained optimistic that despite the June 2024 uptick in headline inflation, prices are expected to moderate in the near term.
“This is hinged on monetary policy gaining further traction, in addition to recent measures by the fiscal authority to address food inflation.
“In its consideration, the Committee noted the persistence of food inflation, which continues to undermine price stability. It was observed that while monetary policy has been moderating aggregate demand, rising food and energy costs continue to exert upward pressure on price development. The prevailing insecurity in food-producing areas and the high cost of transportation of farm produce are also contributing to this trend. Members were, therefore, not oblivious to the urgent benefit of addressing these challenges as it would offer a sustainable solution to the persistent pressure on food prices.
“Also noted in its consideration, is the increasing activities of middlemen who often finance smallholder farmers, aggregate, hoard and move farm produce across the border to neighbouring countries.
“The Committee suggested the need to put in check such activities to address the food supply deficit in the Nigerian market to moderate food prices.
“The MPC, therefore, resolved to sustain collaboration with the fiscal authority to ensure that inflationary pressure is subdued.
“In addition, the Committee expressed optimism about the recent stop-gap measures by the Federal Government to bridge the food supply deficit. In particular, the 150-day duty-free import window for food commodities (maise, husked brown rice, wheat and cowpeas), amongst others, will moderate domestic food prices. Notably, these measures will not lead to a direct injection of liquidity into the economy as to cause further inflation.
“While the measure is a welcome development and may prove effective in the short run, it is expedient that it is implemented with a defined exit strategy to avert a possible rollback of the recent gains in domestic food production. To support these initiatives, the Bank is already engaging Development Finance institutions like the Bank of Industry (BOI) to ensure adequate support to industries with a focus on Small and Medium Scale Enterprises (SMEs).
“The MPC noted the narrowing spread between the various foreign exchange segments of the market, an indication of price discovery and improved market efficiency, thus reducing opportunities for arbitrage and speculation.
“The Committee noted that the increase in the level of external reserves would further build confidence for a more stable exchange rate and thus urged the Bank to explore available avenues to improve inflows, especially through diaspora remittances.
“In addition, Members noted the efforts of the Federal Government and private sector towards improving domestic refining capacity as this is expected to reduce foreign exchange currently being expended on the importation of refined petroleum products.
“The MPC noted the sustained resilience of the banking system, reflected in improvements of key financial soundness indicators (FSIs). Members further encouraged the continued need for close monitoring of the system, as the implementation of the recapitalisation exercise progresses.
“To consolidate on the gains thus far achieved, the Committee re-emphasised its commitment to stay on course with its tightening cycle given the urgent need to address inflationary pressures.”
On Key Developments in the Domestic and Global economies, the CBN noted that “The National Bureau of Statistics, domestic headline inflation rose marginally to 34.19 percent in June 2024, from 33.95 percent in May 2024, driven by the continued rise in the year-on-year components of food and core inflation.
“Similarly, month-on-month headline inflation rose to 2.31 percent in June 2024, from 2.14 percent in the preceding month. The food and core components rose to 2.55 and 2.06 percent in June 2024 from 2.28 and 2.01 percent in May, respectively.
“Real GDP (year-on-year) grew by 2.98 percent in the first quarter of 2024, compared with 3.46 percent in the fourth quarter of 2023, driven by both the oil and non-oil sectors.
“Staff forecasts, however, suggest that the domestic economy will grow by 3.38 percent in 2024, while the IMF has projected growth at 3.1 per cent in 2024.
“As of July 18, 2024, external reserves stood at US$37.05 billion, compared with US$34.70 billion as of end-June 2024. This represents eleven (11) months of import cover for goods and services.
“The global economy, according to the IMF, is forecast to grow at 3.2 and 3.3 percent in 2024 and 2025, respectively.
“Headwinds to the global projection remain the tight global financial conditions and ongoing geopolitical tensions associated with the wars in Gaza and Ukraine, both of which have a significant impact on commodity prices and the global supply chain.
“Global inflation is forecast to continue to decelerate marginally in 2024 but may stay above the long-run objectives of most advanced economy central banks.
“Global financial conditions may remain broadly tight through 2024 and into 2025.
“The Committee reaffirmed its commitment to continue to monitor developments in the global and domestic economies to guide policy and ensure that inflation expectations are adequately anchored.”
The next meeting of the Committee will be held on the 23rd and 24th of September 2024.
