Posted Thu, Sep 26, 2024 3:38 PM

Tightening Measures Persist: Fifth Consecutive Rate Hike in 2024

The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) convened on September 23rd and 24th members voted to increase the Monetary Policy Rate (MPR) by 50 basis points to 27.25 percent, a second slower pace in the rate of increase this year. This marks the fifth instance in 2024 whereby the MPC has adopted a hawkish stance. So far, in 2024, the MPC has raised the MPR by 850 basis points from 18.75 percent in January 2024 (See Fig 1).

Similarly, the committee unanimously raised the asymmetric corridor around the MPR to +500/-100 basis points and retained the Liquidity Ratio at 30 percent. However, the Cash Reserve Ratio (CRR) was increased by 500 basis points to 50 percent for Deposit Money Banks and by 200 basis points to 16 percent for Merchant Banks. The continuous monetary policy tightening stance is aimed at controlling rising inflation.    

The committee highlighted the positive impact of the previous tightening, with the National Bureau of Statistics (NBS) reporting a second consecutive drop in inflation, from 34.2 percent in July 2024 to 32.2 percent in August 2024.

Critical Consideration

1. Effectiveness of MPR: With two consecutive declines in the inflation rate, the MPC noted that inflationary pressures are largely driven by rising energy prices and food inflation due to flooding. Therefore, there is a need to urgently tackle these root causes by collaborating with other MDAs for MPR to be significantly effective.
2. Impact on Borrowing Costs: The increase in the MPR and adjustment of the asymmetric corridor will lead to higher interest rates, making it more difficult to finance investment. This could result in a slowdown in economic activities, dampen economic competitiveness and raise the unemployment rate.
3. Impact on Foreign Investment Inflows: The interest rate adjustment will raise financial market yields, narrowing the inflation gap and improving real yields. This will attract foreign investors, increase portfolio investments, enhance FX liquidity, and support the CBN’s interventions to stabilise the exchange rate.