CBN Doubles Down on Monetary Tightening, Again, Raises MPR to 24.75% to Curb Inflation

•Increases merchant banks’ CRR to 14% from 10% 

•Urges FG to address food insecurity, implement agricultural policies to improve supply 

•Apex bank seeks to expedite banks’ recapitalisation

•Cardoso insists all verified FX backlogs settled, $2.4bn ineligible, security agencies probing dubious transactions

•Says CBN won’t restrict dairy firms from FX market 

•Naira appreciates to N1,350/$1

Ndubuisi Francis, James Emejo in Abuja and Nume Ekeghe in Lagos

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday resolved to raise the Monetary Policy Rate (MPR), the benchmark interest rate by 200 basis points to 24.75 per cent, from 22.75 per cent.

The committee also reversed the asymmetric corridor around the MPR from +100/-700 basis points to +100/-300 basis points.

Also, while it retained the Cash Reserve Ratio (CRR) of deposit money banks (DMBs) at 45.0 per cent, the central bank however jerked up the CRR for Merchant Banks (MBs) from 10 per cent to 14 per cent, and left the Liquidity Ratio (LR) unchanged at 30.0 per cent.

The MPC decision came just as the naira appreciated on the parallel market yesterday to close at N1,350/$1, compared to N1,400 it closed on Monday.

On the official Nigerian Autonomous Foreign Exchange (NAFEM) window, the naira appreciated by N25.09 to close at N1,382.95/$1, compared to N1,408.04 on Monday. Daily foreign exchange turnover also increased by 10.73 per cent to $245.58 million from $221.80 million on Monday.

Addressing journalists at the end of a two-day meeting of the MPC in Abuja, CBN Governor, Mr. Olayemi Cardoso, said the decisions of the committee further underlined the urgency on the part of the apex bank to, “bring inflation under control to ensure that the purchasing power of ordinary Nigerians is restored in the short to medium term.”

This is the second consecutive rates hike by the reconstituted MPC led by Cardoso.

The latest round of policy tightening comes as a surprise to many analysts who has predicted that the apex bank would possibly hold the rates at their levels before the meeting and allow the effects of the previous policy adjustments permeate the system. 

During its February 27, 2024 meeting, the first to be superintended by Cardoso, the apex bank had jolted the markets and beat analysts’ expectations when it raised the Monetary Policy Rate (MPR) by a whopping 400- basis points to 22.75 per cent, from 18.75 per cent – at a period of biting economic hardship occasioned mainly by the removal of fuel subsidy and floating of the Naira.

The bank had also adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points, and further raised the CRR of DMBs to 45 per cent from 32.5 per cent as well as retained LR at 30 per cent.

The MPR is the rate at which commercial banks borrow from the central bank and often determines the cost of funds in the economy, and remains a key barometer for investors.

However, Cardoso, who read the committee’s communique yesterday, said the meeting focused on the current inflationary pressures and the need to anchor inflation expectations as well as ensure sustained exchange rate stability.

He said the committee was faced with the option of either progressing with its tightening cycle or hold, to observe the impact of the previous rate hike and adjustment of CRR.

According to him, after reviewing the balance of risks and the near-term inflation outlook, members

were convinced of the need to progress with the tightening cycle.

Specially, the CBN governor pointed out that members noted the continued rise in headline inflation, driven largely by food prices occasioned by supply shortages and high cost of logistics and distribution.

He said addressing food insecurity remained key to containing current inflationary pressures and therefore, called for the full implementation of the federal government’s agricultural policies and programmes to improve food supply.

The CBN further advised for broader fiscal consolidation particularly on the improvements of tax collection and tax-to-GDP ratio.

The committee particularly commended ongoing efforts of the federal government towards addressing food insecurity, including the provision of various palliatives, release of grains from the strategic reserves, distribution of seeds and fertilisers, as well as farm implements for dry season farming.

The MPC also noted with satisfaction the level of stability achieved in the foreign exchange market in the last few weeks, attributing it to the impact of the apex bank’s recent policy actions and reforms, as well as increased transparency in the market.

The committee further commended efforts of the central bank in offsetting verified foreign currency obligations, an action it believed would greatly enhance investor confidence and attract foreign investments to the country.

Furthermore, the MPC reviewed developments in the banking system and concluded that the industry was safe, sound and stable, adding that the CBN should sustain its surveillance and ensure compliance of banks with existing regulatory and macroprudential guidelines.

The MPC further urged the central bank to expedite action on the recapitalisation of banks to strengthen the system against potential risks in an increasingly globalised world.

Cardoso, however, assured that the current contractionary policy stance of the apex bank may not be long-drawn out as the CBN expects moderation in inflation from May.

He said the MPC would adjust according to the response from its current intervention.

He further insisted that the apex bank had cleared all valid and verified FX backlogs inherited by the current leadership adding that about $2.4 billion remained invalid for payment.

He added that security agencies were currently looking into some of the dubious FX claims with a view to prosecuting the culprits.

He also stressed that the central bank was not oblivious of the impact of interest rate hikes on the economy adding that its successes in the moderation of FX rates was also translating in the reduction of lending rates and costs in the economy.

He said the CBN’s interventions in the FX market may be minimal or non-existent once it achieves the required stability it craves.

Further commenting on the CBN’s lifting forex restriction on dairy products and its impact on the local market, Cardoso maintained that no one should be constrained from accessing the FX market to make purchases, emphasizing the bank’s policy on openness and transparency of FX transactions.

He said, “This is a situation where as far as the central bank is concerned, we observed that it is important that our operations are as open and transparent as possible. Because it is this lack of transparency that drives people away from the market.

“Where the market feels that there’s something that isn’t quite right or there are distortions, there’s a tendency for them to hold back. And one of our objectives, as I’ve said a number of times, is to ensure that we regulate the market in such a way that it is open and transparent.

“We observe that in this particular case, only six companies are allowed to bring in dairy products, milk products and its derivatives, only six and we believe that this is only oligopolistic at its best and that in any case, we should not constrain anybody that wants to come to the foreign exchange market to purchase foreign exchange from doing so.”

He said, “It is not our responsibility. It’s not our job to do that. We should leave the market open, and transparent and let those who are in a position to deal in a particular area do so.  Certainly, we will not ban them from the foreign exchange market. We will not restrict that market to just six players we will not do so.”

Meanwhile, a former Commissioner for Finance in Imo State and Director of the Institute of Capital Market Studies (ICMS) at Nasarawa State University, Keff (NSUK), Prof. Uche Uwaleke, has urged the MPC of the CBN to adopt an incremental approach to MPR tightening.

Reacting to the outcome of yesterday’s meeting of the MPC, Uwaleke, who is Nigeria’s first professor of capital market, observed that the challenge currently facing the Nigerian economy was not just inflation, but stagflation, admonishing that the MPC should equally have regard to growth concerns in its future meetings.

Uwaleke, noted that much as tightening was necessary at this time in view of elevated inflation, the MPC should tighten policy incrementally and in a measured manner that optimises the CBN’s policy tool kit without undue reliance on the monetary policy rate.

He said: “The decision by the MPC to increase the MPR by 200 bps makes it a total of 600 bps in just one month if one adds the 400 bps delivered in February.

“This is in addition to a very high CRR of 45 per cent representing sterilised Bank deposits.

“This development is now driving undue pressure by banks on the CBN’s Standing Lending Facility and increasing cost of funds generally.

“The CBN should recognise that the challenge currently facing the Nigerian economy is not just inflation but stagflation and to this end should equally have regard to growth concerns in future meetings of the MPC.”

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