TUE, 27 SEPT, 2022-theGBJournal| The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) delivered a third consecutive interest rate hike in its aggressive battle against spiraling inflation.
The Committee voted today to raise the interest rates to 15.5 per cent from 14 per cent, adjust Asymmetric Corridor at +100 & -200 basis points around the MPR (interest rate), increase the Cash Reserve Ratio (CRR) of banks to a minimum of 32.5 per cent, and stressed that commercial banks will be debited from their reserves by Thursday at the most.
The MPC also raised the Liquidity Ratio to 30 per cent. This is the most aggressive monetary policy decision ever taken by Nigeria’s central bank in decades.
Domestic inflationary pressures maintained their uptrend as the headline inflation increased by 88bps to 20.52% y/y in August (July: 19.64% y/y) – the highest print since September 2005 (24.32% y/y).
On the one hand, food inflation rose to its highest level since October 2005 (24.56% y/y), increasing by 110bps to 23.12% y/y (July: 22.02% y/y), driven by the low statistical base effect from the prior year amid the lingering existing challenges impeding food production and supply.
On the other hand, core inflation notched higher by 94bps to 17.20% – the highest print since January 2017 (17.87% y/y).
The Q2-22 growth print (+3.54% y/y) suggested the Committee could become cautiously comfortable with the growth levels, giving it a much-needed reason to maintain its fight against the stubbornly-high inflationary pressures, more so that a sustained negative real interest rate could dampen domestic investments and undermine the stability of the local currency.
Moreover, the more hawkish rendition from global central banks also supports the Committee towing the same path to reduce external pressures.
Cordros Research had projected the Committee would likely increase the MPR by at least 50bps and adjust the asymmetric corridor back to its pre-COVID level (+200/-500bps) from +100/-700bps around the MPR.
“If you want to rein in inflation, the option is to raise the interest rate to a level that is equal or possibly higher than the inflation rate, so that inflation rate must lag policy rate,” Godwin Emefiele, CBN Governor said while delivering the Committee’s verdict.
He stressed that if the inflation rate does not lag the interest rate, it becomes a negative interest rate and a disincentive to investors.
According to him, as long as inflation keeps rising, not raising interest rates will retard growth and leave the people poorer than they could have been.
“Therefore it is imperative that you must raise interest rate in order to rein in inflation.”
He, however, admitted that though raising interest rates may retard growth all the same but the reason for raising interest rates is not to help slow down inflation but compensate for an aggressive rise in inflation.
According to him, if the alternative CBN does not raise the rate, consumption and expenditure would be affected because the purchasing power of individuals would be eroded or dissipated.
He argues that the quantity of goods people will be able to buy would also shrink and this will invariably increase the level of poverty.
He, therefore, concluded thus: “You don’t have a choice but to raise interest rates.”
According to him, a study conducted by the apex bank has shown that once inflation trends above 12 or 13 per cent it would definitely retard growth no matter how you try to rein it in.
He noted that in view of the aggressive manner in which inflation has risen in the last four months, it will be difficult for the apex bank not to adopt an equally aggressive approach as it had done today.
He concluded that this is the best option left for the apex bank, even though observer may complain that it will retard growth.
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