Despite headline inflation rising by 0.38 percentage point from 22.41 percent in May to 22.79 percent in June 2023, the Central Bank of Nigeria (CBN) on Tuesday raised its controlling monetary policy rate (MPR) by 25 basis points, from 18.50 to 18.75 percent.
The apex bank, at the end of its Monetary Policy Committee (MPC) meeting, said apart from the adjustment of the MPR, which is also called the lending rate for banks, the asymmetric corridor was also adjusted to +100/-300 basis points from the previous corridor of +100/-700 basis points around the MPR, while the cash reserve ratio (CRR) was retained at 32.5 percent, along with the Liquidity Ratio at 30 percent.
CRR is the percentage of total cash deposits a bank in reserve for its operations, while liquidity ratio is the banks amount of liquid assets available to fund cash outflows and debt obligations.
The MPC meeting, which is the first to be held since the coming into office of the present administration, said the rising inflationary trend was driven by moderate increases in both the food and core components.
The Committee said the major pressures came from security challenges in major food-producing areas as a result of the high cost of transportation due to the increasing price of petroleum products and inadequate public infrastructure.
Identifying the recent policies of deregulation of petrol prices and the transition to a unified and market-determined foreign exchange rate as key drivers to domestic prices, the MPC said this requires greater collaboration between the CBN and the government to ensure macroeconomic stability in the economy.
Urging the monetary and fiscal authorities to sustain its collaboration towards addressing the inflationary pressure, the MPC called for the provision of incentives to domestic investment to reduce unemployment and boost productivity.
The Federal Government, it said, must continue to explore policies to improve investor confidence in the nation’s economy and promote foreign and domestic investments.
Stressing the need to attract investment, particularly, to auto manufacturing, aviation, and rail industries to boost non-oil revenues, the Committee asked the government to adopt key policies to shield the economy from persistent global and emerging domestic shocks.
Although it noted that the recent policy on exchange rate unification would boost market transparency and encourage more foreign capita inflows, the MPC urged the CBN to adopt policies to attract remittances from the diaspora to help moderate exchange rate pressures.
On its decision, the MPC said members were confronted with the option to either hold or marginally hike the policy rate to offset the moderate increase in headline inflation.
On the option to hold, the Committee said members were unanimous that the previous series of rate hikes had indeed greatly moderated the pace of price development and was gradually but steadily yielding the expected outcome.
However, the option to continue to raise the policy rate, albeit moderately, also presents a strong alternative, because of the expected liquidity injections into the economy, as a result of recent policies adopted by the bank.
“The balance of these arguments thus, leaned in favour of a moderate rate hike, to sustain efforts at anchoring inflation expectation, narrow the negative real interest rate gap, and improve investor confidence.
“The MPC, thus, resolved by a majority vote to raise the Monetary Policy Rate (MPR) by 25 basis points and to narrow the asymmetric corridor from +100/-700 to +100/-300 around the MPR,” the Committee said.
