The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has announced its decision to increase the benchmark interest rate, known as the Monetary Policy Rate (MPR), by 50 basis points to 18.5%, prior to the increase in March when the CBN has capped official interest rate at 18 per cent from 17.5 per cent in January, 2023.
This marks the third rate hike by the CBN this year, as revealed by Governor Godwin Emefiele during a post-MPC press briefing on Wednesday, May 24th, 2023.
“The current trend in price development would continue to be monitored by the bank with greater collaboration with fiscal authority to address the drivers of inflation,” Emefiele said.
The move comes as a response to the persistently rising inflation rate in the Nigerian economy. In April 2023, headline inflation reached its highest level since September 2005, standing at 22.22%, compared to 22.04% in the previous month.
The decision to raise the MPR to 18.5% represents the highest level in 22 years for the central bank’s benchmark interest rate.
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CBN Governor, Godwin Emefiele told the news conference that the monetary policy committee saw the continued rise in inflation as still “the biggest challenge confronting macroeconomic stability in Nigeria”. The hike was unanimously voted by 50 basis points, as 10 members voted for a 50-basis point hike and 1 member voted for 25-basis point.
He said policy rate hikes had prevented inflation rising by about 8 percentage points over the past year.
“The MPC (Monetary Policy Committee) therefore opted to tighten, though moderately, to indicate (its) conviction that current policy stance is moderating the rising inflation,” Emefiele said.
The committee highlighted that the aggressive rate hikes were instrumental in curbing inflation, preventing it from reaching as high as 32% in April, compared to the recorded 22.22%.
Key Highlights of the Committee’s Decision:
- Monetary Policy Rate (MPR) increased by 50 basis points to 18.5%.
- Asymmetric corridor of +100/-700 basis points around the MPR was maintained.
- Cash Reserve Ratio (CRR) retained at 32.5%.
- Liquidity Ratio maintained at 30%.
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Significance of the Decision
Nigeria has been grappling with high inflation rates and a depreciating exchange rate in both the parallel and official markets. The surge in headline inflation, reaching its highest level in over 17 years in April 2022, has eroded the purchasing power of citizens. The CBN’s decision to raise interest rates is part of its ongoing efforts to rein in inflation through monetary policy adjustments.
Financial analysts had predicted an interest rate hike ranging from 25 to 50 basis points to address the rapid pace of inflation. By raising the benchmark interest rate, the central bank aims to tighten monetary conditions, control inflation, and stabilize the Nigerian economy.
The impact of this rate hike on various sectors of the economy, including businesses and consumers, remains to be seen in the coming months. However, the CBN’s proactive measures demonstrate its commitment to tackling inflationary pressures and fostering economic stability in Nigeria.
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