People & Money

CBN Raises Interest Rate to 18.75% Against Expectations

After its meeting on Tuesday, the 25th of July, the CBN’s Monetary Policy Committee (MPC) raised the benchmark interest rate (MPR) by 25 basis points to 18.75%, marking the highest rate in 22 years. The Ag. Governor of the CBN, Folashodun Shonubi announced during a press briefing following the two-day MPC meeting.

When addressing journalists in Abuja yesterday, Mr Shonubi noted that the committee had voted to adjust the asymmetric corridor around the MPR by +100 and -300 basis points. Noting that the CRR (Cash Reserve Ratio) remained unchanged at 32.5%, while the liquidity ratio was also maintained at 30%.

Also Read: CBN Retains Key Lending Rate After Facing Policy ‘Dilemma’

The Monetary Policy Committee (MPC) justified the decision to raise interest rates based on the escalating inflation rate in Nigeria. In June 2023, the country’s headline inflation reached a staggering 22.79%, marking the highest rate since September 2005. This alarming surge persisted even after the Central Bank of Nigeria implemented several interest rate hikes over the past 14 months.

After adopting a hawkish stance in May 2022, the Central Bank of Nigeria has significantly raised the interest rate by 725 basis points, soaring from 11.5% to 18.75%. Concurrently, the inflation rate has surged from 17.71% to 22.79%. And with the twin impacts of petrol subsidy removal and the convergence of the exchange rate, inflation is projected to escalate further in the coming period.

Before the first MPC meeting following the suspension of Godwin Emefiele as the governor of the CBN, analysts held varying and divergent expectations. Considering that the President commented on the interest rate as “too high” during his inauguration, some analysts had forecasted that the CBN would lessen its hawkish stance on the monetary policy. However, with the surging inflation rate, it was a widely accepted notion that it is antithetical for the CBN to reduce the interest rate.

The Acting CBN Governor noted that the continuous rate hike was yielding results, saying, “It has made quite a lot of difference and I believe in previous MPCs, we had to indicate and show that every time we have had a rate increase, it has moderated the rate of inflation.

Adding further, “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.”

According to the CBN Communique released after the conclusion of the MPC meeting, it was noted that six members of the MPC voted to raise the MPR while five voted to keep it constant. Of the six that voted for a hike, four voted for an increase by 25 basis points while two voted for a hike by 50 basis points. According to some experts, the CBN’s decision could be seen as an acknowledgement that the central bank’s instruments to control inflation are limited, leading them to resign to fate in the face of rising inflationary pressures.

Prof Uche Uwaleke, a Professor of Finance and Capital Market noted to Daily Trust, “The tepid increase by just 25 basis points to 18.75%  is an acknowledgement of the fact that there’s very little the CBN can do to tame supply side-induced inflation via the policy rate.”

Also Read: CBN Slashes Monetary Policy Rate to 11.5%

In recent months, experts have linked Nigeria’s soaring inflation rate to cost-push inflation, which essentially refers to a decrease in the supply of goods and services resulting from a surge in production costs. Some economists further attributed surging inflation to the rising cost of agricultural produce due to the security challenges faced by farmers. However, the CBN under Godwin Emefiele took a different stance, choosing to take a more restrictive approach to the money supply by consistently hiking the MPR, albeit it was lending money to the Federal Government unabatedly through the “Ways and Means” advances even though in contravention of the CBN Act.

With the money supply hitting an all-time high of N64.3 trillion in June 2023, economists have started to make a switch in their stance, asserting that the money supply is now a contributor to the surging inflation rate.

David Olujinmi

David Olujinmi studies Engineering but his true passion is research and analysis. He writes about finance, particularly the capital market, investment banking, and asset management. More »

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