CBN increases interest rate to 18.75%, highest in 22 Years

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the benchmark interest rate (MPR) to 18.75% from 18.5%, representing the highest interest rate in 22 years.

The announcement was made by the acting CBN Governor, Folashodun Shonubi during a press briefing, after the two-day MPC meeting yesterday.

The meeting was  the first MPC  chaired by the new acting CBN governor, following the suspension of Godwin Emefiele.

This is also the first MPC meeting under President Bola Tinubu’s administration.

Other MPC decisions include narrowing the asymmetric corridor to +100/-300 basis points around the MPR from +100/-700 basis points.

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CRR was retained at 32.5% and the liquidity Ratio was also kept at 30%

According to the MPC, the decision to further hike interest rates was driven by the rate of rising inflation in the country. Nigeria’s headline inflation surged to 22.79% in June 2023, which is the highest rate since September 2005. This is despite multiple interest rate hikes by the CBN in the last 14 months.

Although, inflation is expected to increase further on the back of the twin effects of petrol subsidy removal and the convergence of the exchange rate. Since the CBN switched the gear to a hawkish stance in May 2022, the interest rate has increased by 725 basis points from 11.5% to 18.75%, while inflation has moved from 17.71% to 22.79%.

According to Mr. Shonubi, the hike in interest rate will help narrow the negative real rate of returns as well as encourage foreign investments.

Says continuous rate hike yielding result

Reacting to a question on the potency of a  continuous rate hike, The Ag. Governor said: “It has made quite a lot of difference and I believe in previous MPC’s, we had to the indicate and show that every time we have had a rate increase, it has actually moderated the rate of inflation.

“We agreed that one of the key challenges now was a liquidity overhang and we needed to look at the various tools we had.  We’re looking at every tool in the box that would help us reduce liquidity and that should have a positive impact on reading in inflation.”

CBN not trying to unite rates-Shonubi

Reacting to widening gap between the official I&E window and the parallel market rate, Shonubi said the CBN is not trying to unify any rates. “We believe that we need to encourage the market to be more efficient and to be more effective and that takes a bit of time.

“Some of the volatility you’ve seen over the period have been driven by the fact that the market needs to find its level and also the reality that there’s pent up demand which current supply may not be sufficient for and as we ease and satisfy the pent up demand, we begin to see more efficient markets that runs.

“But you also need to understand that the dynamics of pricing in the market. We feel we should actually stop calling it I& E window because it is now much more than the I & E  for us. It’s a market where everybody and anybody through the licensed institutions can participate. So we expect that overtime sooner rather than later, the volatility as seen would normalize.

He said the role of the Central Bank is to intervene and keep the market at a fairly stable level. “We have our views as to what that level is and as the market continues to oscillate around that level, If there’s a need for us to intervene either by buying or selling, We will continue to do so.

He said the Apex bank has started intervening and have been doing it for a while and we will continue to intervene to bring the market to the levels that it believes should be.

On New naira notes availability

Shonubi explains that the old naira notes are expected to go through a number of cycles and then over time will become worn out and then would be replaced.

“We believe that we have an optimal level of the currency out, So what’s being done is replacement to keep the level rather than just putting money out there. And that is seen by the fact that the banks, whenever they come to us for notes, we provide it to them. If it wasn’t enough, they would be asking us for much more. If it was too much, they’ll be dumping that much more.”

He said overtime, Nigerians will see that the whole notes are replaced out of the system with the new notes.

Experts react

Economist and Capital Market Professor, Uche Uwalake said: “The tepid increase by just 25 basis points to 18.75%  is an acknowledgment of the fact that there’s very little the CBN can do to tame supply side-induced inflation via the policy rate.

“On the other hand, a decision to maintain policy parameters could be misconstrued as insensitivity on the part of the CBN with respect to rising inflation.

“So, it does seem that the MPC decision is an attempt to thread a middle-of-the-road path.”