Central Bank of Nigeria (CBN) Raises Interest Rate by 50 basis points to 26.75%

The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) has increased the interest rate by 50 basis points, raising it from 26.25% to 26.75%. This decision was announced by the CBN Governor, Mr. Olayemi Cardoso, at the conclusion of the apex bank’s 296th MPC meeting held in Abuja.

Alongside the interest rate hike, the MPC has set the Cash Reserve Ratio (CRR) for Deposit Money Banks at 45% and for merchant banks at 14%. The liquidity ratio has been pegged at 30%. Furthermore, the apex bank has adjusted the asymmetric corridor around the Monetary Policy Rate (MPR) from +100 to –300 basis points to +500 and –100 basis points.

Explaining the rationale behind the 50-basis point increase, Mr. Yemi Cardoso, Chairman of the MPC, cited recent economic events such as rising inflation and the need to stabilize the foreign exchange market. He noted the federal government’s efforts to import specific staple foods like rice, maize, and wheat to curb the escalating food inflation but stressed the importance of adhering to the timeline to avoid undermining local food production gains.

Mr. Cardoso also praised the convergence between the official exchange rate and the parallel market rate, viewing it as a crucial step towards reducing arbitrage in the foreign exchange sector.

This latest increase marks the fourth consecutive interest rate hike by the CBN in 2024, continuing from similar hikes in 2023. Since Mr. Cardoso assumed leadership of the apex bank, the MPR has seen a cumulative rise of 800 basis points, escalating from 18.75% to 26.75%.

The CBN’s aggressive stance on interest rate hikes began in February with a 400 basis point increase, followed by subsequent hikes of 200 and 150 basis points, culminating in the current 50 basis point rise.

Criticism from Economists and Industry Experts

Despite the CBN’s justification, the business community has expressed concerns about the trend. The increased cost of accessing capital has notably impacted businesses, with prominent figures like Africa’s richest man, Alhaji Aliko Dangote, asserting that high interest rates stifle economic growth and job creation. Dangote said early this month that economic growth would be unattainable if bank interest rates remained around 30%.

Economists and other industry experts have also raised alarms regarding the efficacy of the CBN’s monetary policy tightening. The World Bank has warned that increasing interest rates, among other CBN policies, will not effectively curb inflation.

Similarly, the National Association of Chambers of Commerce, Industries, Mines, and Agriculture (NACCIMA) has noted that the CBN’s policies contribute to inflation rather than mitigate it.

Economist Kalu Aja criticized the CBN’s approach, likening it to addressing the symptoms rather than the root cause.

“What CBN is doing is addressing the headache of a patient who broke his leg. They have administered panadol, which is legal, correct, and helpful. But the leg is still broken,” he said, pointing out that Nigeria’s inflation is fundamentally a food problem. Aja said that until food becomes affordable, inflation will persist.

Interest Rates Hikes Isn’t Working

For years, the CBN has been raising interest rates as a measure to control inflation. However, these efforts have not yielded the desired results, as inflation rates have continued to climb. The persistent rise in inflation despite monetary tightening raises questions about the effectiveness of interest rate hikes as a standalone tool to combat inflation in Nigeria’s unique economic context.

The CBN’s strategy has been to increase the cost of borrowing, theoretically reducing the money supply and curbing demand-pull inflation. However, the inflationary pressures in Nigeria are largely driven by supply-side factors such as food scarcity, high import costs, and infrastructural deficits, which are less responsive to interest rate adjustments.

This disconnect between policy measures and economic realities has led to growing frustration among stakeholders.