CBN raises interest rate to 18.5%, highest in 22 years

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted by a majority vote to hike the Monetary Policy Rate (MPR) further by 50bps to 18.5% at its May policy meeting, its highest level since November 2002.

In the same vein, the committee voted to maintain other policy parameters at current levels; the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5%, and Liquidity ratio at 30.0%.

In the MPC’s view, the balance of the argument leads sufficiently in favour of further smaller rate hikes to (1) consolidate the gains made so far, (2) support the efforts towards moderating demand-pull inflation, (3) narrow the negative real interest rate gap, and (4) boost the MPC’s credibility following the earlier forward guidance to continue to tighten when confronted with unabating price pressures.

The decision of the CBN is made on the back of the rising inflation rate in the Nigerian economy. Headline inflation rose to 22.22% in April 2023 from 22.04% recorded in the previous month, representing its highest level since September 2005.

CBN Governor Godwin Emefiele, argued that reducing MPR was not even considered and that a hold will be counterfactual to evidence on the ground.

Emefiele also cited evidence that raising rates was reducing inflation, which may have risen to as high as 32% as against 22.22% if rates were not aggressively raised in April.

The committee acknowledged that headline inflation remains high largely due to a host of non-monetary factors outside the reach of the CBN such as intermittent PMS scarcity, expectations of short-term hikes in PMS prices, and lingering challenges confronting the food supply chain.

The committee called on the fiscal authorities to explore other avenues to expand the fiscal safety net and address the urgent need to respond to legacy challenges and emerging shocks impeding the food supply.

Analyst at Cordros capital said the MPC’s decision to increase the MPR further by 50bps at this meeting was in line with its expectations amid the forward guidance provided by the CBN governor at the March meeting. Notably, the committee stated that the key policy dilemma at this meeting was whether to hold or hike marginally to offset the moderate increase in headline inflation.

The analyst said: ‘We do not rule out the committee increasing the MPR further at its next meeting in July, after which a HOLD consideration is likely over subsequent meetings. This is because MPC’s language tone in the past two meetings suggests they are now concerned about the risks of over tightening in a sticky inflationary environment, more so that they acknowledged that the high inflation is largely due to a host of non-monetary factors outside the CBN’s purview.”

However, reacting to the development, finance analyst, Prof. Uche Uwaleke said the decision by the CBN to further hike monetary rates will stifle credit to Nigerian businesses.

According to him, “The hike in MPR to 18.5% is not in the interest of output growth. Access to credit for MSMEs is further stifled.”

He said there is no certainty that the further hike of rates will impact on inflation. “Besides, it may do little to halt the upward trend in inflation as recent experience has shown.

“Any significant moderation in the inflation rate can only come from dealing with supply side factors and structural issues fuelling rising prices such as insecurity, electricity and fuel challenges,” Uwaleke added.