In a strong action against the boiling inflation in Nigeria, Central Bank of Nigeria increased the Monetary Policy Rate (MPR) by 50 basis points to a record high of 26.75%. The 296th meeting of the Monetary Policy Committee (MPC) was held on July 22-23, 2024, during which these eleven members evaluated recent economic trends for determining risks in and around Nigeria’s financial stability.
The top decision of MPC was raising the MPR by 50 basis points, pointing to an aggressive take against inflation. The Committee reviewed the asymmetric corridor around the MPR to +500/-100 basis points, reflecting a further widening of the range for interest rate adjustments. The Cash Reserve Ratio (CRR) for Deposit Money Banks and Merchant Banks remains at 45.00% and 14.00%, respectively, while the Liquidity Ratio is retained at 30.00%.
Tackling Inflationary Pressures
The MPR hike was done against the back of increases in inflation, which the MPC conceded to have been a major threat to household and business stability. Headline inflation rate for June 2024 rose slightly to 34.19% compared to 33.95% in May 2024. The month on month inflation rate was also seen to be on the rise at 2.31% vis-à-vis 2.14%. Food inflation, contributed by rising food and energy prices, continues to be a major concern.
The MPC has said it is determined to lower inflation and expects to attain the set target through tight monetary policies in combination with other government measures recently adapted to stabilize food prices—including the 150-day window for importing essential food commodities, including maize, husked brown rice, wheat, and cowpeas, duty-free. While these interventions are meant to offer relief in the short term, the MPC needs to be reassured that a well-defined exit strategy is in place to avoid long-term repercussions on domestic food production.
Economic Stability and Growth
In all these inflationary pressures, Nigeria’s economy has exhibited some level of resilience. Real GDP increased by 2.98% year-on-year in Q1 2024, driven by both the oil and non-oil sectors. Projections now point to growth of 3.38% in 2024, with the IMF a little more conservative at 3.1%. The MPC also noted a narrowing spread among different market segments in the foreign exchange market—indeed, a strong signal of improved efficiency in the market and a shrinking potential for arbitrage. This, combined with the increase in external reserves to $37.05 billion as of July 18, 2024, serves as some sort of economic buffer by offering an eleven-month import cover for goods and services.
Wrapping up
Increasing the interest rate to 26.75% is a big step by CBN to stabilize the Nigerian economy in the times of increasing inflation. For this purpose, the MPC is striving for long-term stabilization through a strict policy of monetary tightening and strategic initiatives ensuring productivity within the country, in addition to the market efficiency. The results and an updated picture of how effective these measures turn out to be and how the economic scenario shapes up will be presented at the next meeting of the MPC on September 23-24, 2024.