To some analysts, the raisng of the interest rate, (MPR), anchor rate on which banks lend to customers, (MPR) by 50 basis points to 18.5 percent, for the third time this year, signals firm grip on the economy by Godwin Emefiele, CBN governor, who has been fighting fierce battle against inflation and dwindling fortunes of the local currency, Naira.
Nigeria has been grappling with a high inflation rate as well as a depreciating exchange rate both at the parallel and the official market.
Current figures at both the markets show that even the unrealistic rate at the official market has not been steady, exchanging N463/$ on Tuesday as against N462/$.
Similarly, at the black market it , plummeted to an average exchange rate of N762/$1 on Tuesday, May 23rd, 2023, representing a 0.26% depreciation from the previous day’s trading session, where the it was valued at N760/$1.
This is coming on the heels of Nigeria’s real GDP which grew by 2.31 percent in Q1 2023 as against 3.52 in Q4 2022
However, the decision of the CBN was made on the back of the rising inflation rate in the Nigerian economy. Headline inflation rose to 22.22% in April 2023 from 22.04% recorded in the previous month, representing its highest level since September 2005.
Headline inflation rose to its highest level in over 17 years in April 2022, eroding the purchasing power of citizens,
CBN’s interest rate at 18.5 percent represents its highest level in 22 years.
The central bank continues to rein in inflation using monetary policy tweaks, by increasing interest rates, a development that curtailed credit access to the real sector of the economy, which operators, like many Nigerians are faced with rising cost if electricity that is still epileptic and diesel, among others.
According to Bismarck Rewane, chief executive of the Financial Derivatives Company (FDC) in Economic Bulletin for May 15, “the inflationary trend in Nigeria is consistent with both the global and regional direction. The commodities that witnessed the highest spikes are tomatoes, yam and other tubers. A basket of tomatoes jumped by 100% to N70,000 from N35,000 in March.”
Commenting further, the economist said “There are two major uncertainties that have been impacting inflation expectations & psychology in the past few months. These are the price of diesel and the temporary appreciation of the Naira in the forex market. In April, the price of diesel fell by 35% to N640/litre while the Naira appreciated by 1.33% to N740/$ in the parallel market. The pass-through effect on domestic prices has been relatively muted. This is because according to Keynes, prices are usually sticky downwards.
“The MPC meets next week for the last time in this administration and expectations are for a 25 basis points increase in the monetary policy rate (MPR), in line with most other Central banks.”
Emefiele at the post-MPC press briefing held on Wednesday 24th, 2023 stated that it has unanimously voted to hike its monetary policy rates or interest rates by 50 basis points, as 10 members voted for a 50 basis point hike and 1 member 25 basis point.
According to the governor, the MPC members believe that reducing MPR was not even considered and that a hold will be counterfactual to evidence on the ground.
They also cited evidence that raising rates was reducing inflation which may have risen to as high as 32% as against 22.22% if rates were not aggressively raised in April.
Highlights Of Committee’s Decision:
Increase MPR by 50 basis points to 18.5%
The asymmetric corridor of +100/-700 basis points around the MPR was retained
CRR was retained at 32.5%
While the Liquidity Ratio was also kept at 30%