Despite its tight monetary policy stance in the last one year, the Central Bank of Nigeria (CBN) expressed concern on Wednesday that its interventions have failed to rein in rising inflation towards a single digit.
Consequently, the apex bank gave reasons why its Monetary Policy Committee (MPC) opted to further moderately hike the lending rate, while retaining other policy parameters.
Addressing reporters at the end of the 291st Meeting of the MPC in Abuja, the CBN governor, Godwin Emefiele, since May 2022 when the Bank adopted the tight monetary policy stance in the economy, rising inflation has remained the biggest challenge confronting macroeconomic stability in the country.
He lamented that the monetary policy intervention of the Bank has failed to decelerate inflation towards its long-run objective, with headline inflation remaining high due to a number of non-monetary issues outside the control of the CBN.
During the meeting, the CBN governor said the MPC identified some of the issues driving inflation in the economy including the perennial scarcity of Premium Motor Spirit (PMS) and expectations of short-term hikes in the pump price of petrol; high and rising price of various energy sources; and a host of headwinds confronting the food supply chain.
To curb spiraling inflation, the MPC called on the government to explore other avenues to expand the fiscal safety net to urgently improve its capacity to respond to legacy and emerging shocks in the economy.
“Non-oil revenue sources, such as the expansion of the tax bracket, will enable the reduction of fiscal deficit and public debt to improve fiscal space,” the Committee.
At the end of the meeting, the MPC resolved with a vote of 10:1, among the 11 members that attended the meeting, to raise the monetary policy rate (MPR) to 18.5 percent from 18.0 percent, and retain the asymmetric corridor of +100/-700 basis points around the MPR.
Also, the Committee resolved to retain the cash reserve ratio (CRR)of banks with the CBN at 32.5 percent, and the Liquidity Ratio at 30 percent.
Acknowledging the impact of the CBN monetary policy intervention in recent times, Emefiele said research showed that without its aggressive monetary policy rate hikes, which moderated the rise in inflation, the situation would have been worse.
Although inflation rate was about 22.22 percent in April 2023, Emefiele said indications were that it could have risen to 30.48 percent had the MPC not taken the decision to tighten monetary policy, by raising policy rates since May 2022.
“The cumulative effect of MPC’s policy rate hikes moderated the rise in inflation by about 800 basis points since last year,” Emefiele said.
Besides, concerned about the decline in output growth, on a year-on-year basis, to 2.31 percent in the first quarter of 2023, compared with 3.11 percent in the corresponding quarter the previous year, the CBN governor said the Committee was faced with the challenge to hold or loosen monetary policy, to refocus on growth, or tighten further, to rein in inflation.
Although he said members were unanimous that given that a rising trend in inflation would hurt further growth, they also saw the imperative to continue to cautiously focus on price and monetary stability.
Consequently, he said the MPC wants the CBN management to further explore other exchange rate policies to moderate the pressure in the foreign exchange market.
While expressing optimism about the continued progress made through the RT200, Naira-for-dollar and other policies targeted at attracting trade and diaspora remittances to grow foreign reserves and improve liquidity in the foreign exchange market, Emefiele said the MPC expressed the need for increased monetary and fiscal coordination to support recovery in the domestic economy.
On the decision whether to hold, loosen or tighten, the CBN governor said the Committee ruled out the option of holding the policy rate at this time, as this would dilute CBN’s policy to rein in inflation, with projections showing a rising trend in headline inflation in the coming months.
Emefiele said the Committee was also against the option of loosening, arguing that this would compound the pressure and trigger further macroeconomic instability in the economy, further widen the negative real interest rate margin and worsen domestic financial and money market conditions, including triggering a Naira depreciation.
In considering the available options, the CBN governor said the Committee weighed positively in favour of the benefits of its rate hikes, which he noted, helped moderate the continued rise in inflation, growth in new credits and reduction in the aggregate demand fuelling the inflationary pressures.
Consequently, based on the continued upward risk observed in price development, driven primarily by expectations of rising energy and food prices; unabating security challenges in food-producing areas and persisting exchange rate pressure, Emefiele said the Committee opted to lean in favour of further marginal hike in the MPR.