CBN Raises Interest Rates To 16.5%

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), on Tuesday, raised interest rate by 100 basis points to 16.5 percent.

The CBN Governor, Godwin Emefiele cited persistent inflation and threats of global macro-economic headwinds that have occasioned capital flow reversals from emerging and developing economies to US dollar denominated investments in developed economies as reasons.

Briefing news men after two-day meeting in Abuja, Emefiele, said Nine of the 11 members of the CBN’s policy-setting committee voted to increase benchmark monetary policy rate (MPR) by 100 basis points to 16.5 percent while two members voted to increase rate by 50 basis points. It was the highest since 2001.

The governor who said that tightening would curb a higher rate of inflation and boost investor confidence noted that an assessment of the impact of previous rate hike indicated significant improvement in inflation pressures, and therefore expressed hope that further increase in rates would curb inflation.

However, the MPC retained asymmetric corridor of +100/-700 basis points around the MPR and also left cash reserve ratio (CRR) at 32.5 percent and liquidity ratio at 30 percent.

In an unprecedented aggressive monetary policy tightening, the apex bank had, this year, increased interest rate from 11.5 percent to 15.5 percent in September across three consecutive rate hikes in a determined effort to combat rapidly rising inflation rate which rose to 21.09 percent in October 2022 from 20.77 percent in the previous month.

The monetary policy rate (MPR) is the baseline interest rate in an economy around which every other interest rate used within an economy derives. It is the benchmark interest rate at which CBN lends to commercial banks.

Fielding questions from journalists, Emefiele, said that there was a noticeable positive impact of the previous hike, admitting that raising the rate was actually hurting economic growth, adding that loosening it “would greatly jeopardize the gains of previous policy rate hikes” and counterproductive against aggressive inflation rate.

Emefiele also disclosed that President Mohammadu Buhari would launch the new Naira notes on Wednesday, November 23, 2022, insisting that there is no shifting the deadline for withdrawal of the old currency notes as some have speculated and called for so doing.

Citing persistent increases in energy prices, supply chain bottlenecks, rising inflation in advanced economies, and looming food crisis, and sharp increase in interest rates leading to tightening of external financial conditions, capital flow reversals, as well as the volatility of the oil market, the CBN governor, said that the headwinds have made losing option undesirable, stressing that inflation and rates hike may continue into unforeseeable future.

“With a rise in inflation, loosening the stance of policy will lead to a more aggressive rise in inflation and will erode that gain already achieved through tightening. As regards whether to hold MPC was of the view that they won’t stand at the period close to December festive and expected heavy spending during the 2023 general election,” Emefiele said.

“MPC decided to continue to tighten, but at a somewhat more moderated rate, noting that tightening the stance of policy would narrow the negative real effective interest rate margin and force improve market sentiment and further restore investors confidence.”