The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), in its 286th meeting which was held on the 18th and 19th of July, 2022, resorted to tightening the monetary policy stance of the country as the key rate in the economy was raised to 14 percent.
CBN Governor Godwin Emefiele announced this on Tuesday during the 286th meeting of the Monetary Policy Committee held in Lagos.
The CBN had previously raised the interest rate from 11.5 percent to 13 percent in May, however, the continued rising inflation rate in the country occasioned a further interest rate hike to 14 percent this year. Furthermore, the 14 percent interest rate is the highest in 3 years as data from the CBN shows that the last time the MPR reach 14 percent was in 2019.
The CBN believes a hike in the interest rate was the right option given the rising inflationary pressure in the country. This move to curtail inflation from spiraling out of control is expected to stabilize the economy, considering the current economic realities.
While addressing reporters after the Monetary Policy Committee (MPC) meeting in Lagos, the CBN Governor, Godwin Emefiele said “the committee resolved that the most rational policy option would be to further strengthen its tightening stance to effectively curtail the unabated rising trend of inflation.”
Members of the Monetary Policy Committee were conscious of the fact that output growth remained fragile. However, not curtailing inflation now could erode the monetary gains achieved in improving consumer purchasing power and thus worsen the poverty level for the vulnerable populace.
Overview of the MPC’s Decision
- MPR raised by 100 basis points from 13 percent to 14 percent;
- The Asymmetric Corridor was retained at +100/-700 basis points around the MPR;
- The CRR retained at 27.5 percent and;
- Liquidity ratio of 30 percent was maintained.
The Central Bank of Nigeria (CBN) is not the only monetary regulator to tighten its monetary policy rate. Many central banks around the world have raised their rates as they seek to combat unrelenting inflationary pressure.
The World Bank, in its June 2022 Global Economic Prospect stated that “Russia’s invasion of Ukraine and its effects on commodity markets, supply chains, inflation, and financial conditions have steepened the slowdown in global growth.”
One key risk highlighted in the report is “the possibility of high global inflation accompanied by tepid growth. This could eventually result in a sharp tightening of monetary policy in advanced economies, leading to financial stress in some emerging market and developing economies.”
What you need to know
- The monetary policy rate (MPR) is the baseline interest rate in an economy, every other interest rate used within an economy is built on it.
- The CBN’s move in raising the interest rate is consistent with the high inflation rate in the country which hit a five-year high in June 2022. Higher interest rates reduce the rate of money expansion, making borrowing more expensive, and curtailing both consumption and investment. This will help in taming the rising inflation.
