Nigeria’s central bank Increases interest rate by 400 basis points to 22.75%

Amidst mounting concerns over Nigeria’s economic stability, particularly the persistent rise in inflation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) convened its inaugural meeting for the year on February 26th and 27th, 2024.

The committee, comprised of twelve members, deliberated on the necessary steps to address the prevailing economic challenges and announced several key decisions aimed at tightening monetary policy.

The decisions are as follows:

Monetary Policy Rate (MPR) Increase: The committee opted to raise the Monetary Policy Rate by 400 basis points, pushing it to 22.75 percent from its previous level of 18.75 percent.

Adjustment of Asymmetric Corridor: The MPC adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points.

Increase in Cash Reserve Ratio (CRR): The Cash Reserve Ratio was elevated from 32.5 percent to 45.0 percent.

Retention of Liquidity Ratio: The Liquidity Ratio was retained at 30 percent.

These decisions were motivated by the prevailing inflationary pressures, exchange rate instability, and projections of future inflation trends. The Committee expressed deep concern over the sustained upward trajectory of inflation and emphasized its commitment to curbing this trend.

While acknowledging the trade-off between promoting output growth and combating inflation, the MPC stressed the importance of maintaining low and stable inflation for sustainable economic expansion.

The transition to an inflation-targeting framework was deemed crucial in addressing inflationary pressures, with the committee commending the fiscal authorities for their support in this regard. The committee weighed the options of maintaining the status quo or increasing the policy rate to counter inflationary pressures, ultimately opting for the latter.

Headline inflation surged to 29.90 percent in January 2024, up from 28.92 percent in December 2023, driven by increases in food and core inflation. Factors contributing to inflationary pressures included exchange rate pass-through, escalating energy costs, high fiscal deficits, and security challenges in key food-producing regions. Additionally, global factors such as tight financial conditions and geopolitical tensions posed significant upside risks to domestic inflation.

Despite inflationary concerns, the Nigerian economy exhibited modest growth, with real GDP expanding by 3.46 percent in Q4 2023, driven by improvements in both the oil and non-oil sectors. Projections for 2024 indicated varying growth forecasts by different entities, with the CBN forecasting growth at 3.38 percent, the Federal Government of Nigeria (FGN) at 3.88 percent, and the International Monetary Fund (IMF) at 3.00 percent.

The CBN said on the external front, gross external reserves witnessed an increase to US$34.51 billion as of February 20, 2024, compared to US$32.23 billion at the end of January 2024. This improvement was attributed to reforms in the foreign exchange market and an uptick in oil production, among other factors.

While the MPC’s decision to raise the MPR was applauded by experts, concerns were raised regarding the elevated Cash Reserve Ratio and liquidity ratio.

Financial analyst Kelvin Emmanuel noted that Nigeria’s CRR, currently at 45 percent, significantly surpasses the global benchmark average of 15 percent recommended by the Bank for International Settlements. He warned of potential challenges for banks, including increased non-performing loan ratios, amidst efforts to meet regulatory requirements and improve asset quality.

“Asking the banks to park 45% of all deposits with a quick, current, and operating cash flow ratio at 30% in the same year where you want them to recapitalize their minimum capital requirement and improve their asset quality is quite the stretch. The weighted Non-performing loan book average will definitely rise above 7%,” he said.