CBN Raises Interest Rate to 22.75% to Combat Inflation
By Patience Ikpeme
In an effort to combat inflation and stabilize the foreign exchange market, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has made the decision to significantly increase the interest rate to 22.75 percent.
Led by Governor Mr. Yemi Cardoso, the MPC met in Abuja and made several key decisions. The benchmark interest rate, known as the Monetary Policy Rate (MPR), was raised by 400 basis points to 22.75 percent from 18.75 percent. This is the highest MPR since 2017 and aims to make borrowing more expensive, reducing money supply and curbing inflation.
Additionally, the Cash Reserve Ratio (CRR), which is the portion of customer deposits that banks must hold as reserves with the CBN, was raised from 32.5 percent to 45 percent. This further restricts the amount of money available for lending in the economy, contributing to inflation control.
The asymmetric corridor around the MPR was also adjusted to +100/-700 basis points from +100/-300 basis points. This change provides the CBN with more flexibility to manage liquidity in the banking system, while the Liquidity Ratio, the minimum amount of liquid assets banks must maintain, remains at 30 percent.
Governor Cardoso stated that these decisions were made in the MPC’s commitment to taming inflation, which has been persistently rising. He recognized the trade-off between economic growth and inflation control but believes that “long-term growth is only possible in a stable environment with low inflation”.
Looking forward, Cardoso acknowledged the importance of partnering with the government and the fiscal side to address non-monetary factors contributing to inflation, such as “insecurity and infrastructural deficits”. The MPC commended ongoing fiscal initiatives aimed at reducing living costs and improving food supply.
During the press conference, Cardoso revealed that $26 billion passed through Nigeria from “sources and users who we can not adequately identify”
He expressed concerns about potential illicit activities and suspicious flows within the cryptocurrency sector, specifically mentioning Binance Nigeria. The CBN Governor emphasized their determination to regulate the crypto market and prevent manipulation, highlighting collaboration with law enforcement agencies for thorough investigations into infractions.
The CBN assured Nigerians of its commitment to clearing the backlog of genuine requests for foreign exchange and revealed that they recently paid out “$0.4 billion to those identified”. They aim to improve market liquidity and transparency by attracting more foreign exchange and minimizing distortions. The CBN governor disclosed that “recent tools have already attracted $2 billion” and expects further progress.
Cardoso emphasized the adoption of a stricter regulatory environment with zero tolerance for non-compliance, particularly by banks. The CBN is working closely with law enforcement agencies to investigate and address infractions.
The Governor also shared positive news about the country’s gross external reserves, which stood at “US$34.51 billion on February 20, 2024, compared with US$32.23 billion at end-January 2024”. The improvement was attributed to reforms in the foreign exchange market and an increase in oil production.
According to forecasts, the Nigerian economy is expected to grow in 2024 by 3.38 percent (CBN), 3.88 percent (FGN), and 3.00 percent (IMF).
