Posted Thu, Nov 28, 2024 9:42 AM

Relentless Inflation Control: Sixth Consecutive Rate Hike in 2024

The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) convened on November 25th and 26th, and members voted to increase the Monetary Policy Rate (MPR) by 25 basis points to 27.5 percent, a third slower pace in the rate of increase this year. This marks the sixth consecutive hawkish stance making 875 basis points increase in MPR from 18.75 percent in January 2024 (See Fig 1).

In retrospect, the committee unanimously retained the asymmetric corridor around the MPR to +500/-100 basis points, alongside the Liquidity Ratio at 30 percent. The Cash Reserve Ratio (CRR) also remained unchanged at 50.00 percent for Deposit Money Banks and 16 percent for Merchant Banks.

The committee emphasised commitment to price stability as the bedrock of a thriving Nigerian, which necessitates substantial monetary tightening as all measures of inflation rose year-on-year, with headline inflation inching upward to 33.9 percent in October 2024.

Critical Consideration

1. Effectiveness of MPR: Inflation has continued to rise despite sustained monetary tightening, primarily due to structural issues such as surging energy prices (particularly rising fuel prices), deficit in critical infrastructure and poor agricultural output driving food inflation. The MPC stressed the importance of deepening collaboration with fiscal authorities to synchronise the objectives of price stability and sustainable growth.
2. Impact on Borrowing Costs: The upward adjustment of the MPR will further increase borrowing costs. This may constrain access to credit for businesses, suppress investment activity, reduce economic competitiveness, and heighten unemployment.
3. Impact on Foreign Investment Inflows: The policy rate hike is expected to improve real returns on investments despite ongoing inflation. This could boost foreign portfolio inflows, enhance FX liquidity, and support the CBN’s interventions to stabilise the exchange rate amidst macroeconomic uncertainties.