Steering the Nigerian Economy Through Monetary Policy Decisions
For three consecutive Monetary Policy Committee (MPC) meetings, the Central Bank of Nigeria (CBN) hike interest rates to curtail inflation. Patience Ikpeme reports
In 2024, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) faced the formidable challenge of navigating a turbulent economic landscape marked by inflationary pressures, exchange rate instability, and fluctuating external conditions. Against this backdrop, the MPC convened three pivotal meetings that underscored its unwavering commitment to stabilizing prices, anchoring inflation expectations, and fostering sustainable economic growth.
Each decision reflected a careful balancing act. In its September meeting, the MPC focused on sustaining the downward trend in headline inflation while addressing core inflation and exchange rate pressures. By November, as inflation resurged, the Committee adopted a more cautious but targeted approach, fine-tuning policy measures to mitigate persistent price pressures. These decisions were complemented by strategic interventions aimed at enhancing external sector resilience, supporting financial stability, and promoting financial inclusion to improve the effectiveness of monetary policy transmission.
Collectively, these three meetings illustrate the CBN’s proactive and adaptive policy stance in an increasingly complex economic environment. The MPC’s decisions highlight the interplay between monetary and fiscal policies, emphasizing the need for coordinated efforts to achieve macroeconomic stability while safeguarding growth prospects. This series of measures serves as a testament to the Bank’s resolve to address immediate economic challenges while laying a foundation for long-term economic resilience.
CBN’s Tightening Strategy: Navigating Inflation and Growth
In a bid to combat persistent inflationary pressures and stabilize the Nigerian economy, the Central Bank of Nigeria (CBN) has continued its aggressive monetary tightening strategy. Over the past year, the apex bank has made bold and deliberate moves, underscoring its unwavering commitment to price stability, exchange rate equilibrium, and sustainable economic growth.
The Monetary Policy Committee (MPC) has taken a series of unprecedented decisions to address inflation’s upward trajectory, which has posed a significant threat to household incomes, investment flows, and overall macroeconomic stability. At its May 2024 meeting, the MPC raised the Monetary Policy Rate (MPR) by 150 basis points to 26.5%, the highest rate in decades. This marked the beginning of a more aggressive approach, as the Bank sought to contain inflation by curbing excess liquidity in the economy.
The CBN also introduced innovative measures, including the issuance of new 30- and 60-day Central Bank Bills. This move was aimed at absorbing excess liquidity in the financial system while simultaneously providing alternative investment instruments to reduce speculative activities in the foreign exchange market. Additionally, the Bank introduced the Securitised Open Market Operation (SOMO), an instrument strategically designed to mop up idle funds and temper inflationary tendencies.
These actions coincided with a sharp decline in currency-in-circulation levels, as the Bank pursued monetary stability with rigorous determination. While the tightening measures were ambitious, they reflected the MPC’s belief that failing to act decisively could result in severe economic repercussions.
The results, though gradual, have been notable. Inflation has begun to moderate, with headline inflation showing signs of easing after months of persistent increases. The CBN has credited this development to its robust monetary policy stance, complemented by the government’s fiscal interventions and structural reforms aimed at stabilizing food prices and addressing supply-side challenges.
However, the road to economic recovery remains fraught with challenges. The CBN acknowledges the delicate balance required to maintain the progress achieved in moderating inflation while ensuring that tightening measures do not stifle economic growth. Concerns about liquidity levels in the banking system, the impact of rising energy costs, and the implications of fiscal deficits continue to dominate discussions.
Central to the MPC’s strategy has been the pursuit of exchange rate stability, a critical factor in Nigeria’s economic equation. The unification of exchange rates across various market segments, coupled with tighter monetary policies, has fostered a degree of confidence in the foreign exchange market. This convergence is expected to create an enabling environment for businesses to plan in the medium to long term, thereby enhancing economic resilience.
The MPC’s resolve to sustain these efforts reflects its recognition of the structural and systemic challenges confronting the Nigerian economy. The Bank has repeatedly emphasized the need for coordinated efforts between monetary and fiscal authorities to address these issues holistically. Key areas of focus include mitigating the impact of global energy prices, curtailing excess liquidity, and improving domestic production capacity to reduce reliance on imports.
As Nigeria navigates this critical phase, the CBN’s actions highlight the importance of proactive and adaptive policymaking. While the tightening measures are not without their trade-offs, they underscore the MPC’s commitment to steering the economy toward a more stable and sustainable future. The months ahead will test the effectiveness of these interventions, but the resolve of the CBN to tackle inflation head-on provides a glimmer of hope for the Nigerian economy.
This feature provides context for understanding the foundation of the CBN’s current monetary policy trajectory, setting the stage for subsequent analyses of its decisions and their broader implications.
Balancing Tightening Policies with Economic Stability
On September 24, 2024, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) reaffirmed its commitment to combat inflationary pressures and stabilize the Nigerian economy. In a significant move, the Committee raised the Monetary Policy Rate (MPR) by 50 basis points to 27.25%, marking another step in the Bank’s tightening cycle. Alongside this, the Cash Reserve Ratio (CRR) was increased by 500 basis points to 50% for Deposit Money Banks and by 200 basis points to 16% for Merchant Banks, while the asymmetric corridor around the MPR was retained at +500/-100 basis points. The Liquidity Ratio remained unchanged at 30%.
This decision was taken amidst a backdrop of moderating inflation trends and a relatively stable foreign exchange market. Headline inflation had shown year-on-year moderation in July and August 2024, a development attributed to a dip in food inflation. Additionally, the exchange rate across various market segments exhibited relative stability and convergence, a direct result of the CBN’s tight monetary stance. This stability has bolstered market confidence, enabling businesses and economic agents to engage in medium- to long-term planning.
However, the MPC acknowledged the persistent challenge posed by elevated core inflation, driven by rising energy prices. Despite the progress made in moderating headline inflation, the uptrend in energy costs underscored the complexity of Nigeria’s inflation dynamics. The Committee noted the need for closer collaboration with the fiscal authorities to address this issue comprehensively.
One of the key areas of concern for the MPC was the continued growth in money supply, which has contributed to excess liquidity in the financial system. This surplus liquidity has fueled demand pressures in the foreign exchange market, exacerbating the challenges posed by inflation. The Committee expressed concern over the growing fiscal deficit but commended the fiscal authority for its commitment to avoid monetary financing through Ways and Means. Furthermore, the strong correlation between Federation Account Allocation Committee (FAAC) releases and liquidity levels in the banking system prompted the MPC to enhance its monitoring efforts to mitigate their effects on price stability.
Food inflation remained a critical issue, with the MPC identifying several risks, including flooding, energy price hikes, scarcity of Premium Motor Spirit (PMS), and insecurity in farming communities. Given the significant weight of food in Nigeria’s Consumer Price Index (CPI) basket, the Committee stressed the importance of addressing these challenges. It commended the Federal Government’s efforts to enhance security in farming regions and bridge food supply deficits through the duty-free import window for key commodities.
The MPC also expressed optimism about the anticipated lifting of refined petroleum products from the Dangote Refinery, which is expected to reduce transportation costs and ease food price pressures. This development could also lower foreign exchange demand for refined petroleum imports, thereby improving the external reserve position and overall balance of payments.
The resilience of the banking sector was another focal point for the MPC. Despite prevailing economic headwinds, key financial soundness indicators revealed that the sector remained safe, stable, and sound. Nevertheless, the Committee emphasized the importance of sustained supervisory oversight to ensure the industry continues to support economic recovery.
In its deliberations, the MPC evaluated the optimal policy path to maintain the downward trend in inflation, stabilize the exchange rate, safeguard the banking system, and support economic growth. The Committee acknowledged that real interest rates remain negative despite the recent moderation in inflation. To attract both domestic and foreign investments, the MPC emphasized the importance of achieving a positive real interest rate. Such a move would enhance Nigeria’s competitiveness in the global economy and improve exchange rate dynamics by attracting international capital.
Ultimately, the decision to further tighten monetary policy reflected the MPC’s resolve to safeguard the progress made in curbing inflationary pressures. While the tightening measures may present trade-offs in terms of output growth, the Committee underscored the importance of prioritizing price stability as a foundation for sustainable economic recovery.
The September 2024 MPC decision represents another decisive step in Nigeria’s journey toward macroeconomic stability. By addressing inflation, stabilizing the exchange rate, and maintaining a resilient financial system, the CBN continues to signal its commitment to steering the Nigerian economy onto a more sustainable trajectory.
Navigating Renewed Inflationary Pressures
The Central Bank of Nigeria’s Monetary Policy Committee (MPC) convened on November 26, 2024, amid heightened inflationary pressures. The outcome of the meeting was a cautious tightening of monetary policy, with the Monetary Policy Rate (MPR) raised by 25 basis points to 27.50%. Other key parameters, including the Cash Reserve Ratio (CRR) for Deposit Money Banks and Merchant Banks, as well as the Liquidity Ratio, were retained at 50.00%, 16%, and 30%, respectively.
This policy decision followed the resurgence of inflation across headline, food, and core measures in October 2024, both on a year-on-year and month-on-month basis. The MPC expressed concern over the persistence of price pressures and their adverse effects on household income and overall welfare. The Committee underscored its commitment to addressing these developments with decisive policy measures.
Food prices remained a dominant driver of inflation, but the MPC commended the Federal Government for its improved security measures, particularly in the North-East. These efforts, the Committee observed, are likely to enhance agricultural output and mitigate food inflation over time. However, the rising cost of energy, amplified by higher Premium Motor Spirit (PMS) prices, continued to impact production and distribution costs for food and manufactured goods.
Despite these challenges, the Committee expressed optimism about the potential benefits of full deregulation in the downstream petroleum sector. By eliminating fuel scarcity and stabilizing prices, deregulation is expected to yield positive outcomes in the short to medium term. Members also reiterated the importance of strengthening collaboration between monetary and fiscal authorities to achieve synchronized objectives of price stability and sustainable growth.
The external sector showed signs of improvement, marked by an increase in the current account surplus, enhanced remittance inflows, and capital inflows. These factors contributed to a more robust external reserve position, signaling the effectiveness of recent policy measures. However, the MPC acknowledged persistent exchange rate pressures stemming from high demand in the foreign exchange market. To address this, the Committee urged the CBN to explore innovative measures to boost market liquidity.
The banking sector’s stability and resilience were also highlighted during the meeting. Despite internal and external headwinds, key financial soundness indicators, including Capital Adequacy Ratio (CAR), Non-Performing Loan Ratio (NPL), and Liquidity Ratio (LR), remained strong. The MPC emphasized the importance of sustained surveillance to ensure continued compliance with regulatory thresholds and the health of the financial system.
Furthermore, the Committee recognized the CBN’s ongoing efforts to deepen financial inclusion, noting its critical role in enhancing the effectiveness of monetary policy transmission. By broadening access to financial services, these initiatives aim to improve the reach and impact of monetary interventions across the economy.
The MPC’s deliberations focused on selecting the most effective policy options to counter rising inflation, stabilize the exchange rate, and anchor inflation expectations. The decision to adopt further tightening measures underscores the Committee’s commitment to safeguarding economic stability while navigating the complex trade-offs between price stability and growth objectives.
The last three Monetary Policy Committee (MPC) meetings of 2024 showcased the Central Bank of Nigeria’s (CBN) proactive stance in addressing the nation’s economic challenges. In the face of persistent inflationary pressures, exchange rate volatility, and external shocks, the MPC demonstrated its resolve to uphold price stability while fostering a conducive environment for sustainable growth.
From the bold tightening measures in July and September to the more cautious adjustments in November, the MPC’s actions reflected a nuanced understanding of the evolving macroeconomic landscape. Each decision was informed by a commitment to curbing inflation, moderating food and energy price pressures, enhancing external sector resilience, and ensuring the stability of Nigeria’s financial system.
