For the first time in two and half years, the Central Bank of Nigeria (CBN) has increased interest rates to 13.5%, attributing the increase to global developments.
CBN’s Monetary Policy Committee (MPC) had maintained the interest rate at 11.5% since 2019.
The interest rate also known as Monetary Policy Rate (MPR) or lending rate is the rate at which banks lend money to their customers.
The apex bank Governor, Godwin Emefiele, who spoke on the outcome of the MPC meeting, said the reason for the interest rate increase was to tame inflation and support growth.
Emefiele added that, “The MPC was suspicious that there might be an aggressive accretion of inflation. To forestall this, the MPC quickly moved to check the impending inflation by increasing the Monetary Policy Rate (MPR) by 150 basis points.
“Despite raising the interest rate, members of the MPC voted to retain the other parametres at: asymmetric corridor +/- 100/700 basis points around the MPR; retain the Cash Reserve Ratio (CRR) at 27 per cent.”
According to him, “The members urged the management of the CBN to, among others, continue to use its discretionary powers to mop up liquidity where they find it, make sure they maintain a very tight monetary liquidity in the system; and retain the liquidity ratio at 30 per cent.
“The committee decided by a unanimous vote to raise monetary policy rate. Six members voted to raise the MPR by 150 basis points, four members by 100 basis points and one member by 50 basis points to 13 per cent.
“You all would have seen that the price of crude quite unexpectedly has been above $100 per barrel. Nigeria’s bonny light was $116 per barrel as at yesterday. It means that yes, whereas food prices have gone up, the cost of refining and the pump price at the station would naturally have gone up. This is a global phenomenon.
“We have a situation where as inflation is rising to unprecedented levels in the US and other economies, growth is also coming down and if you must tackle inflation and at the same time you want growth, then you know you are facing a compelling dilemma as to what to do.”
With regards to inflation, Emefiele said, “You like to see inflation come down and at the same time, you want growth to go up. To achieve this, you have to make decisions that are in opposite directions. That brings to bear the kind of skills you have to ensure that you are able to manage these two in a way that you are able to maintain a balance where you see a moderation in inflation and at the same time, grow your economy.
“We have seen inflation in the US hit 8.3 per cent, unprecedented; in the Euro area, inflation hit 7.4 per cent; in UK: 9 per cent, in China, to as high as 2.1 per cent in India, about 7.79 per cent. These are price levels that are unprecedented in decades. And that is the reason the global economy, particularly Central Banks and monetary authorities globally are thinking of the need for them to confront inflation. And to do this, it means that a lot of tough decisions have to be taken.”
“What we have been saying is: we want to pursue a place of price stability that is conducive to growth and that is why somehow, we have used our development finance interventions facilities, which have actually yielded positive results to help to drive growth in our economy, while at the same time, we try to maintain a hold position (that maintains interest rate and its parametres) by looking at the optimum level of liquidity in the industry to be able to moderate inflation at a level that it does not hurt the growth of the economy,” he said.
He said, “With what the apex bank has seen globally, either in the area of supply chains, increase in the price of petroleum products and the rest of them, we have seen aggressive growth in inflation in Nigeria between March and April of 2022.
“The forecast from our statisticians both in CBN and National Bureau of Statistics (NBS), as well as our colleagues in Research and Monetary Policy indicates that unless some drastic or significant actions were taken, it may be difficult for us to really rein inflation if we don’t do something immediately.
“You can use monetary policy to drive growth and see how you can use those same tools through the granting of facilities and low-interest rates to see how you can use it to drive agricultural and manufacturing output to a level where it can even be positive in moderating prices. With that you achieve output growth, through our intervention schemes; you can boost consumption expenditure and boost growth.
“The aggressive rate at which inflation was rising globally, as a result of the after effects of the Covid-19 pandemic and Russia Ukraine war, it had become necessary to bring into the football field, the MPR to say that we need interest rate to move up, particularly in the non-priority sectors.
“With what is happening globally on prices and out and we’ve seen a 90 basis points increase in inflation with the expectation that it may even further continue at the aggressive rise, it means that we needed to bring it to the fore, the MPR to say that we need interest rate to move up, particularly in the non-priority sectors.”
He noted that the MPC was “looking at a need for the interest rate to ‘signal’, make it more aggressive because MPC felt that a 150-basis point would be necessary to really show that we want to truly tame inflation and rein it into a level it can begin to reverse.
“Lending rates will go up to the non-priority sectors, we are not going to deny that, but at least to our priority sectors where we remain committed to, MPC has told management to continue its development finance activities at single digit interest rate for 10 years loan with two years moratorium.”
According to the CBN Governor, “This decision to increase MPR has been taken because we felt that there may be an aggressive acceleration in inflation in the next couple of months and we think there is a need to take some drastic action to reverse it.
“If we are able to see a reversal, perhaps we can say we are returning to what we can call a normal period when we can use CRR to moderate inflation and at the same time, using our development finance to really push for growth.”
He said, “The MPC wants to see how we can tame inflation which is our core mandate and at the same time support growth in the other direction so that Nigerians can see prosperity effectively.”
While reacting to claims that Nigeria has been kicked out of the JP Morgan Bond Index, Emefiele dismissed the claim as false.
According to him, “Nigeria was delisted from the JP Morgan Bond Index, Nigeria is still in that index. Nigeria’s rating was only reclassified. It’s a mere reclassification of our size in the index. It is akin to a rating agency changing your rating from positive to stable.
“This is basically what’s happening. I repeat, Nigeria has not been deleted from the JP Morgan bond index. What they said was that Nigeria has been left as an overweight country because they felt as an oil producing country, there should be an increase in accretion to reserve in the midst of an increase in crude price, and seeing that this is not happening, that is the reason Nigeria’s rate has been brought from overweight to market weight.”