CBN increases interest rate to 18.75% in first MPC session since Emefiele’s suspension

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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the benchmark interest rate (MPR) by 25 basis points to 18.75% from its initial 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 on Tuesday, 25th July 2023. This is the first MPC meeting 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.

Highlights of the MPC decision

The MPR was increased by 25 basis points to 18.75%

The asymmetric corridor was narrowed to +100/-300 basis points around the MPR from +100/-700 basis points

CRR was retained at 32.5%
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 been 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.

Nigeria’s money supply increased by a whopping N8.8 trillion in June 2023 to N64.3 trillion from N55.5 trillion recorded as of the previous month. This is the highest level on record according to data from the CBN.

The significant rise was despite contractionary measures adopted by the CBN to tighten the level of liquidity in the country. However, money supply and currency in circulation have continued to spike significantly.

Specifically, currency in circulation rose N2.6 trillion In June from N2.5 trillion in the previous month, while currency outside banks’ vault increased to N2.26 trillion from N2.18 trillion as of the prior month.

In the same vein, credit to the government increased to N31.2 trillion from N30.7 trillion, while credit to the private sector surged to N52.8 trillion from N44.8 trillion recorded in May 2023.

The surge in money liquidity and inflationary pressure in the country despite the hawkish move of the CBN, indicates that raising interest rates alone is not enough to tighten liquidity and clamp down on inflation.

In arriving at its decision, the MPC pointed out that it was faced with either a hold or a hike situation of the Policy rate to offset the impact of the continued rise in inflation, which is currently 22.79%.

The Acting CBN Governor said the decision to moderate the magnitude of the rate hike was to improve investor confidence. He added that the MPC stressed the need for monetary and fiscal policies to incentivise domestic investments that can reduce unemployment in the economy. The MPC also harped on attracting investments into sectors like Auto Manufacturing, Aviation, and the Real Sector.

Assessing the issues around the rising tide of food inflation (25.25%) in the country, the Acting CBN Governor highlighted the Security challenges in the food belts of the country, the high cost of transportation from rising energy prices and the Inadequacies in public infrastructure as challenges that need to be addressed.

According to him, Nigeria’s economic outlook was moderate, and the significant risks that need to be mitigated include Insecurity, High Cost of Energy Products and Foreign Exchange Pressures in the economy.

The committee’s decision means that a 225bp cumulative rate hike in the monetary policy rate has been conducted in 2023 by the Monetary Policy Committee of the Central Bank of Nigeria. Proshare, in its Analyst Note for today, had projected that the MPC will raise the monetary policy rate by 25 to 50 basis points.

The CBN defended its independence by extending its longest phase of monetary tightening to tame inflation, despite calls by President Bola Tinubu for borrowing costs to be lowered in his inaugural speech.

In related news, the International Monetary Fund in its latest World Economic Outlook, projected that the Global Economy will grow at 3% for the remainder of 2023 , while Nigeria is expected to grow at 3.2%.