Posted Fri, Jul 26, 2024 1:18 PM

The Fourth Consecutive Policy Rate Hike in 2024

The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) convened for its fourth meeting on July 22nd and 23rd. The committee members voted to increase the Monetary Policy Rate (MPR) by 50 basis points, a slower pace in the rate of increase - the shortest increase this year- to 26.75 from 26.25 percent. This marks the fourth instance in 2024 whereby the MPC has adopted a hawkish stance. Throughout these four consecutive meetings, the MPC raised the MPR by 800 basis points from 18.75 percent in January 2024 (See Fig 1).  

However, the committee unanimously agreed to adjust the asymmetric corridor around the MPR to +500/-100 from +100/-300 basis points, leaving other monetary policy parameters unchanged. The Cash Reserve Ratio (CRR) for Deposit Money Banks was retained at 45 percent, for Merchant Banks at 14 percent and the Liquidity Ratio at 30 percent. The primary rationale behind the aggressive restrictive monetary policy is to control the rising inflation rate. Despite this, inflation reached a 28-year high of 34.2 percent in June 2024, up from 34 percent in May 2024. According to MPC members, inflationary pressures are driven by insecurity in food-producing areas, high route-to-market costs, middlemen hoarding and exporting goods, and exchange rate depreciation.

Critical Consideration

1. Impact on Borrowing Costs: With the asymmetric corridor adjustment and the MPR increase, bank lending rates will adjust as appropriate. For instance, the lower and upper bound of the corridor suggests that the standard lending and deposit rates extended to Deposit Money Banks are now 31.75 percent and 25.75 percent, respectively. Consequently, both prime lending rates and maximum lending rates would adjust upward.

2. Impact on Foreign Investment Inflows: The adjustment in interest rates will also impact the financial market yield as an increase in yield narrows the inflation differential and improves the real yield. This reduction in the differential will attract foreign investors, resulting in an improved inflow of portfolio investments, thereby boosting FX liquidity and supporting the CBN's FX interventions, stabilising the exchange rate.