The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday resolved to raise the Monetary Policy Rate (MPR), the benchmark interest rate by 50 basis points to 26.75 per cent from 26.25 per cent.
The committee also adjusted the asymmetric corridor around the MPR to +500/-100 from +100/- 300 basis points.
It however retained the Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) at 45 per cent and Merchant Banks at 14 per cent, as well as retained the Liquidity Ratio (LR) at 30 per cent.
This is the fourth time in a row that the central bank has raised interest since February.
Addressing journalists at the end of the two-day meeting of the MPC in Abuja, CBN Governor, Mr. Olayemi Cardoso, said the committee was mindful of the effect of rising prices on households and businesses and expressed its resolve to take necessary measures to bring inflation under control.
The committee further re-emphasised its commitment to CBN’s price stability mandate, expressing optimism that despite the June 2024 uptick in headline inflation, prices are expected to moderate in the near-term.
This came as Director General,
Nigeria Employers Consultative Association (NECA), Mr. Adewale-Smatt Oyerinde, said the hike in MPR was unlikely to douse inflation amid the Naira’s continued depreciation at the FX market.
Also, Chief Executive, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, the marginal increase in MPR marked a softening of the MPC’s tightening stance.
The MPC further doubled down on its commitment to stay on course with its tightening cycle in view of the urgent need to address inflationary pressures to consolidate on the gains achieved so far.
The committee particularly hinged its optimism on monetary policy gaining further traction, in addition to recent measures by the fiscal authority to address food inflation.
Cardoso, who read the committee’s communique, specifically noted the persistence of food inflation, which continues to undermine price stability.
He said while monetary policy has been moderating aggregate demand, rising food and energy costs continue to exert upward pressure on price development.
Notably, the CBN governor pointed out that the prevailing insecurity in food producing areas and high cost of transportation of farm produce are also contributing to headline inflation.
He said the committee was therefore not oblivious to the urgent benefit of addressing these challenges as it will offer a sustainable solution to the persistent pressure on food prices.
The CBN also considered the increasing activities of middlemen who often finance smallholder farmers, aggregate, hoard and move farm produce across the border to neighbouring countries.
The committee, thus, highlighted the need to put in check such activities in order to address the food supply deficit in the Nigerian market to moderate prices.
The MPC, therefore, resolved to sustain collaboration with the fiscal authority to ensure that inflationary pressure is subdued.
According to Cardoso, the MPC further expressed optimism with the recent stop gap measures by the federal government to bridge the food supply deficit.
In particular, he noted that the 150-day duty free import window for food commodities including maize, husked brown rice, wheat and cowpeas, among others, will moderate domestic food prices.
The central bank stated that these measures will not lead to direct injection of liquidity into the economy as to cause further inflation.
The apex bank boss also noted that while the measure was a welcome development and may prove effective in the short run, “it is expedient that it is implemented with a defined exit strategy to avert a possible rollback of the recent gains in domestic food production.
He stated that to support these initiatives, the CBN was already engaging Development Finance institutions (DFIs) including the Bank of Industry (BOI) to ensure adequate support to industries with a focus on Small and Medium Scale Enterprises (SMEs).
On the Foreign Exchange (FX) segment, Cardoso noted the narrowing spread between the various foreign exchange segments of the market, which he said was an indication of price discovery and improved market efficiency, thus reducing opportunities for arbitrage and speculation.
The MPC also noted that the increase in the level of external reserves would further build confidence for a more stable exchange rate and thus urged the bank to explore available avenues to improve inflows, especially through diaspora remittances.
The committee also acknowledged the sustained resilience of the banking system, reflected in improvements of key financial soundness indicators (FSIs), and further encouraged the continued need for close monitoring of the system, as the implementation of the recapitalisation exercise progresses.
Cardoso also explained that the various reform initiatives in the FX segment had been positive.
He said the exchange rate has converged, limiting the opportunities for arbitrage.
He disclosed that FX inflows had increased from 37.93 per cent between January and May 2024 to $38.8 billion while net inflows grew by 73.4 per cent May 2024 compared to May 2023.
Cardoso also stated that diaspora remittances had currently gone up to $2.34 billion compared to $1.58 billion in the corresponding period last year.
He said capital importation also increased to $5.92 billion between January and June compared to $1.77 billion in the same period last year.
He said, “So, that’s all very positive for foreign exchange management. We’ve also seen that on the capital markets policies, the capital market has been responding positively and of course, the banking sector.
“We have been very aggressive in giving guidance to the banks with respect to how we want them to position themselves for the future of the $1 trillion economy.
“Inflation targeting is something that is an ongoing process, which we will be giving more and more guidance as we go along.”
The CBN governor insisted that the aim of monetary policy decisions were meant to impact the man on the street, pointing out that the current economic hardships were a result of policy choices by past administrations.
He said, “It is important to cast our minds back and ask ourselves how did we get to where we are today. Let us not forget that over a period of time, we had an economy and have failed to diversify that economy. We would argue that the Nigerian economy has basically been a monolithic one, dependent on one source of revenue.
“Now, of course, a monolithic economy has its own risks. And part of those risks, of course, is that if anything happens to your dependency, then the whole system gets shaken.
“And I guess in many respects, that is part of what we’re going through. Part of it is, not all, certainly part of it because let’s not forget that there are global headwinds as well.
“And that going forward, we must ensure that we are able to craft policies that are sustainable and will bring a sustainable method of development for our people.”
Cardoso said the CBN was currently engaging with the Organised Private Sector (OPS) which had been raising concerns over the continued monetary tightening regime of the bank.
He said, “Inflation really and truly is having a major impact on our economy. Purchasing power is getting eroded. People are being pushed into different categories of poverty, and it is in their own interest that we are able to take the scourge of inflation.
“If not, the ramifications will also be for them. It’s not on the average man alone. We understand the need for growth and we also understand that it is relatively challenging when you have high-interest rates.
“We also understand that, quite frankly, my belief is that it is so fundamental to the long-term future and stability of our economy that inflation should be brought under control that in the short term these are pains which ultimately will be able to help our economy and help the manufacturing businesses as well.”
On CBN’s recent policy on dormant accounts, Cardoso said the move was in the interest of account holders, adding that the apex bank should be commended for taking the steps to safeguard them from fraudsters.
He said, “Over the years, in my experience what I found personally, is that if you leave the accounts dormant in banks…In fact, most times, they are more susceptible to fraudsters copying your identity and trying to game the system to grab all of your money.
“So, that is a problem that I think most DMBs face and I’m sure if you’ve been on the receiving end, I have been, then you know that anything that can protect you in the process from these kinds of predators will be welcomed.”
He said the policy directive was meant to ensure that all those monies come to the central bank for safekeeping. You don’t lose your money and it is at zero cost to the beneficiaries.
“All that will happen is that the central bank will manage the monies within our position and when the rightful owner surfaces, the money is returned, plus whatever income is accrued to them.
“I think this should be a welcome development, even from the naysayers because at a time like this, we recognise the fact that everybody needs every single penny that belongs to them, to accrue to them and not have a situation where you’re putting money in a particular place and essentially end up losing it. Of course, it will create liquidity within the system as well.”
However, reacting to the policy rate adjustment, Oyerinde stated that the latest increase in MPR in the second quarter to address the persisting inflationary growth in the economy might not be sufficient to tackle inflation “as long as the Naira kept depreciating at the foreign exchange market”.
He observed that the upward adjustment in policy rate would lead to further increase in cost of credit, which is about 30 per cent at the moment.
The NECA boss said it has become more difficult for businesses to maintain existing investments and almost impossible for significant new investments to take place.
According to him, “The persistent use of MPR to moderate inflation may yield limited results so long as the huge depreciation in Naira’s value that has shrunk business activities in the real sector remains unchecked.”
He therefore urged the CBN to prioritise an exchange rate management procedure that will address the huge erosion in Naira’s value.
He also emphasised the need for a strong and deepened collaboration between monetary and fiscal authorities in the management of the economy.
He said, “A collaboration of Federal Ministry of Finance, Federal Ministry of Budget and Economic Planning and CBN in economic policy development will be most efficacious in the current economic quagmire.”
Also, the CPPE chief executive
said the hike in interest rate appeared to be a moderation in the CBN’s aggressive tightening stance.
Yusuf said it is perhaps a reflection of some responsiveness to the clamour by stakeholders in the real economy for the apex bank to effect a deceleration in its rate hikes.
He said: “Although my preference was for a pause on the rate’s increases because of the enormity of the headwinds that businesses are grappling with.
“But the marginal increase marks a softening of the tightening stance.
“It is tolerable and I believe we should now accelerate the implementation of the fiscal policy measures to tackle inflation.
“Already the Economic Stabilisation Plan contains a number of laudable fiscal policy measures that could reduce production costs in the economy.”
He said it was also important and urgent for the government to adopt and quickly implement the recommendation of the Presidential Committee on Fiscal and Tax Reforms on the customs duty exchange rate, which proposed N800/dollar.
“The adoption of this recommendation would have a considerable impact on the cost of goods and services in the country,” he said.
Ozioma Samuel-Ugwuezi, James Emejo, Nume Ekeghe
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