CBN again raises benchmark interest rate, MPR to 24.75% to check inflation

Central Bank of Nigeria (CBN) at the end of its 294th monetary policy meeting further raised the MPR by 200bps to 24.75% and tweaked the asymmetric corridor around the MPR to +100/-300 from +100/-700. However, Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) for Commercial banks were left unchanged at 45.0% and 30.0%, respectively. Meanwhile the CRR of Merchant bank was raised 400bps to 14.0%. The liquidity ratio is retained at 13%.  Yemi Cardoso, the CBN Governor, who is also the Chairman of the MPC, said the decisions were in furtherance of commitment of the committee to curbing inflation and restoring the value of the Naira. The increase in the MPR has been a contentious issue since its last hike to 22.75% at the February meeting of the MPC.

While some experts agreed with the decision of the MPC to raise the MPR, others did not, contending that the hike would further worsen the economic situation. The MPR is the nominal anchor of banks’ lending rates. With the hike in the rate, lending rates are expected to rise in tandem, making it costlier to borrow from the banks. This reduces money in circulation, which in turn reduces spending and ultimately checks the inflationary growth. The country’s headline inflation rose to 29.90% in January 2024 from 28.92% in December, according to the National Bureau of Statistics (NBS). Some experts, who supported the CBN decision, have even suggested a further hike of the MPR rate given the inflation rate which has remained untamable.

The experts have suggested a further hike in the rate by at least 200 basis point which is in tandem with the new decision of the apex bank. The International Monetary Fund (IMF) also commended the decision of the CBN in hiking the MPR to tame rising inflationary trend in the country. The IMF gave its endorsement after the conclusion of its 2024 Article IV Mission to Nigeria in March. Axel Schimmelpfennig, its Mission Chief for Nigeria, said the team welcomed the Monetary Policy Committee (MPC)’s decision to further tighten monetary policy stance.

“Nigeria’s economy has faced various challenges in recent times, including high inflation, currency depreciation, and fiscal pressures. The policy rate hike is expected to have ripple effects across the economy, impacting borrowing costs, investment decisions, and overall economic activity. This decision should help contain inflation, which reached 29.9 per cent year-on-year in January 2024, and pressures on the Naira,” Schimmelpfennig had said.