The Central Bank of Nigeria (CBN) has raised the monetary policy rate by 400 basis points to a record 22.75 per cent from 18.5 per cent.
Members after the two-day meeting in Abuja increased the asymmetric corridor to +100 basis points /-700 basis points (Previously: +100 basis points /-300 basis points) while they also increased the Credit Reserve Ratio (CRR) to 45.0 per cent from 32.5 per cent; and retain liquidity rate at 30 per cent.
The CBN Governor, Olayemi Cardoso disclosed this at the 293rd Meeting of the Monetary Policy Committee in Abuja and said the increase of the anchor rate was to moderate the country’s soaring inflation rate, which stood at 29.90 per cent in January.
The decision of the MPC also coincided with the announcement by the CBN of the sale of foreign exchange to Bureau de Change (BDC) operators in the country at N1,301 per USD, according to a Tuesday memo signed by Hassan Mahmud, the director of the Trade and Exchange Department at the apex bank.
The resumption of the sale of forex to BDCs is happening more than two years after the former CBN governor, Godwin Emefiele, stopped the sales to BDC operators in that segment of the forex market.
According to the memo, the move is part of CBN’s “strategic step” to increase liquidity and strengthen the naira against “manipulators”.
However, the new aggressive stance of CBN in raising the anchor interest rate, which determines what the banks charge on facilities to customers, is being queried by Prof. Uche Uwaleke of the Department of Banking & Finance, Nasarawa State University, who said jerking up the MPR by 400 basis points in one fell swoop is simply overkill, suggesting that 200 basis points would have been better since they have another opportunity to meet next month to review impact.
“They didn’t stop at MPR, they also jerked up the CRR to 45 per cent which at the previous level of 32.5 per cent was among the highest in Sub-Saharan Africa.”
He observed that the CBN Governor had assured that the policies of the bank would be evidence-based but Uwaleke questioned the empirical results to support the aggressive move which could leave the real sector in an adverse position and negative implications for deposits in the bank.
” I pity the real sectors of the economy. The implication is that for every deposit in the bank, CRR takes 45 per cent of it while the liquidity ratio takes 30 per cent. So it is only 25 per cent of the deposit that banks can lend
This decision, the University Don said, has negative implications for access to credit, cost of capital for firms, cost of debt service by the government, and asset quality of banks.
“Expect banks to quickly re-price their loans with negative consequences for non-performing loans and financial soundness indicators.
“By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non-monetary factors driving it, the output is bound to shrink
“So, expect lower GDP numbers, especially from Agric and Industry sectors as well as a surge in unemployment levels. This is not a welcome development.” He added.
The last time the MPC raised interest rates was in July under the former acting governor, Fola Shonubi and Cardoso in its maiden MPC tightened the monetary policy measures.
The Chief Executive Officer of the Financial Derivatives Company, Bismarck Rewane, said the Central Bank Monetary Policy Committee will have no option but to tighten interest rates amid soaring inflation and economic hardship.
Mahmud in the memo, noted that the CBN will sell the United States dollars to BDC operators at N1,301 per USD and the BDC operators are expected to sell to customers at not more than 1 per cent above the purchase rate from the CBN.
It would be recalled that the naira recently went as high as, even above N1,800 to the dollar.
Part of the statement reads: “Following the ongoing reforms in the foreign exchange market, aimed at achieving an appropriate market-determined exchange rate for the Naira, the Central Bank of Nigeria (CBN) has observed the continued price distortions at the retail end of the market, which is feeding into the parallel market and further widening the exchange rate premium.
“To this end, the CBN has approved the sale of foreign exchange to eligible Bureau De Change to meet the demand for invisible transactions. The sum of $20,000 is to be sold to each BDC at the rate of N1,301/$- (representing the lower band rate of executed spot transactions at NAFEM for the previous trading day, as of today, 27th February 2024).
“All BDCs are allowed to sell to end-users at a margin NOT MORE THAN one per cent (1 per cent) above the purchase rate from CBN.”
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