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CBN increases interest rate to 26.25%
Story from Usman UMAR
The Monetary Policy Committee of the Central Bank of Nigeria (CBN) has once again increased the benchmark interest rate by 1.5 percentage points from 24.75 percent to 26.25 percent.
The committee also kept the asymmetric corridor unchanged at +1 and -3 percentage points.
The MPC also maintained the Cash Reserve Ratio at 45 percent and the liquidity ratio at 30 percent.
CBN Governor, Olayemi Cardoso, stated that the primary focus remains on achieving price stability in order to curb inflation.
However, Cardoso disclosed that while the Monetary Policy Rate was increased, all other rates were retained.
Revealing the considerations of the MPC, Cardoso said, “The key focus of the MPC at this meeting remained to achieve price stability by effectively using tools available to the monetary authority to rein in inflation. Members observed that while year-on-year inflation in April 2024 rose moderately, the month-on-month headline food and core measures declined significantly.
“This follows a decline in month-on-month headline and food measures in March 2024, suggesting that the recent tight monetary stance of the bank is beginning to yield the desired outcome. The MPC, however, noted that the inflationary pressure continued to be driven by food inflation.
“The committee, thus, reiterated several challenges confronting the effective moderation of food inflation including rising cost of transportation of farm produce, infrastructure constraints along the line of distribution network, security challenges in some food-producing areas and exchange rate pass-through to domestic prices for imported food items.
“The MPC urged that more be done to address the security of farming communities to guarantee increased food production in these areas.”On the continued instability of the Nigerian currency, Cardoso said that it was a function of the free market system.
“Members further observed the recent volatility in the foreign exchange market attributing this to seasonal demand, a reflection of the interplay between demand and supply of a freely functioning market system. The committee also noticed the marginal increase in the foreign reserve between March and April 2024,” he said.
Since the MPC resumed meeting this year, this is the third consecutive increase that has been done. In all, the MPC has increased the MPR by 750 basis points since February.
The MPR was increased by 400 basis points to 22.75 per cent from 18.75 per cent in February. It was increased by 200 basis points to 24.75 per cent in March and currently by 150 basis points to 26.75 per cent in May.
The MPC has maintained a hawkish stance since in a bid to tackle Nigeria’s persistent inflation.
As of April, Nigeria’s inflation rate had risen to 33.69 per cent. The April 2024 headline inflation rate showed an increase of 0.49 per cent points when compared to the March 2024 headline inflation rate, according to the National Bureau of Statistics (NBS).
The NBS said that on a year-on-year basis, the headline inflation rate was 11.47 per cent points higher compared to the rate recorded in April 2023, which was 22.22 per cent. Food Inflation was 40.53 per cent in April 2024.
Meanwhile, some analysts projected a rate hike in line with the avowed stance of the CBN to fight inflation with some projecting an interest rate of 25.75 per cent, which the MPC has surpassed.
In their weekly macroeconomics report ahead of the MPC, analysts at Meristem Research projected that the MPC would hike rates in line with its avowed inflation-fighting stance.
The analysts said, “During the meeting, we expect the committee to deliberate on disinflationary trends observed in advanced economies, as well as the sustained ‘high for longer’ interest rate stance employed by monetary authorities to effectively combat inflation in these economies.
“In the domestic economy, Nigeria’s inflation rate came in lower than expected in April 2024, rising to 33.69 per cent from 33.20 per cent in the previous month (marking the 16th consecutive month of inflation uptrend). This uptick is primarily attributed to increases in both the food and core indexes, driven by higher food prices and the continued depreciation of the naira.”
Analysts at Cordros Asset Management echoed similar sentiments that the MPC may increase their benchmark rate, projecting a 0.5 per cent hike.
They pointed out that aside from global central banks approaching the end of the interest rate hiking cycle, “we think the MPC has reached a point where overtightening becomes a concern even as the debate remains on what constitutes a neutral interest rate that will not hurt domestic growth.”
“As such, we think the dilemma for the committee at the meeting will remain whether to continue its rate hike to further dampen the rising inflation trajectory or adopt a hold stance to observe emerging developments and allow for the impact of the last rate hikes to permeate the economy.
“In our view, given that the end of rate hikes by systemic global central banks is in sight amid sticky domestic inflation, we think the MPC is likely to maintain a slower rate hike at this meeting. Indeed, at the post-MPC conference in March, the CBN governor stated that maintaining aggressive tightening poses a risk to financial system stability.”
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