Why Interest Rate Should Rise To 14.5% – Emefiele

The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, has explained why he wanted the Monetary Policy Rate, otherwise known as interest rate, to be increased to14.5 per cent.

Emefiele expressed this inclination at the July Monetary Policy Committee (MPC) meeting, where he voted for interest rate to be increased by 150 basis points.

Interest rate is the amount a lender charges a borrower and is a percentage of the principal — the amount loaned.

The MPC of the CBN has at its last meeting in July raised the interest rate by 100 basis points from 13 per cent to 14 per cent, further tightening its monetary policy measure in fight against inflation and other macroeconomic challenges.

In his personal statement, contained in the MPC communique released on Wednesday, the CBN governor explained that based on the objective of price stability, his inclination was to decisively contain inflationary pressure and expectations without impairing the long-run growth path.

He said, “Primarily, it is imperative to disentangle the evolution of the current inflationary dynamics, unravel the underlying drivers, and respond accordingly.

“I recognise that the current inflationary pressure is due to both structural and monetary factors, and underscore the urgent need to rein in inflation.

According to Emefiele, a loosening policy rate at this time will be antithetical as it could trigger massive capital outflow, intensify exchange rate depreciation and worsen inflation.

He also asserted that a holding policy rate could be sub-optimal given the already negative real interest rate that could undermine investments and exacerbate the pressure on the external balance.

“I am convinced that policy tightening, to a significant degree is crucial at this time. I believe that given the over 84 and 200 basis points increases in headline and food inflation, respectively, aggressive tightening is necessary to dampen pervasive inflation, contain expectations, and provide a forward guidance,” he added.

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