CBN Increases Monetary Policy Rate To 26.75%

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at its 296th meeting Raised the Monetary Policy Rate (MPR) by 50 basis points to 26.75 per cent from 26.25 per cent.

The MPR corridor for bank rates serves as a structural guide for the central bank’s monetary policy operations, ensuring that the money market is stabilised and that liquidity disturbances in the economy are minimised.

According to a communique issued by the Central Bank of Nigeria (CBN) following the meeting, the Committee also adjusted the asymmetric corridor around the MPR to +500/-100 from +100/300 basis points, and kept the Cash Reserve Ratios of Deposit Money Banks at 45.00 per cent and Merchant Banks at 14 per cent, while keeping the Liquidity Ratio at 30.00 per cent.

The CBN Governor, Olayemi Cardoso, stated that the Committee’s decision was guided by some significant facts, that it was aware of the impact of rising prices on households and businesses, and that it was determined to take the necessary measures to control inflation.

“It re-emphasized its commitment to the Bank’s price stability mandate and remained optimistic that, despite the June 2024 increase in headline inflation, prices will moderate in the near term. This is dependent on monetary policy gaining traction, as well as recent fiscal authority measures to combat food inflation.

“During its deliberations, the Committee noted the persistence of food inflation, which undermines price stability. While monetary policy has helped to moderate aggregate demand, rising food and energy costs continue to put upward pressure on price growth. This trend is also aided by widespread food insecurity and the high cost of transporting farm produce. Members were therefore not oblivious to the urgent benefit of addressing these challenges, which will provide a long-term solution to the persistent pressure on food prices.

“Also considered is the growing role of middlemen, who frequently finance smallholder farmers, aggregate, hoard, and transport farm produce across borders to neighbouring countries. The Committee advocated for the cessation of such activities to address the Nigerian market’s food supply deficit and moderate food prices. As a result, the MPC decided to continue working with the fiscal authority to keep inflation under control.

“The Committee also expressed optimism about the Federal Government’s recent stop-gap measures to bridge the food supply deficit. The 150-day duty-free import window for food commodities (maize, husked brown rice, wheat, and cowpeas, among others) will help to keep domestic food prices down.

“It is worth noting that these measures will not result in a direct injection of liquidity into the economy, thereby causing further inflation.

“While the measure is a welcome development and may be effective in the short term, it is critical that it be implemented with a defined exit strategy to avoid a reversal of recent gains in domestic food production.

“To support these initiatives, the Bank is already collaborating with Development Finance institutions such as the Bank of Industry (BOI) to ensure adequate support for industries, with a focus on Small and Medium Scale Enterprises (SMEs).”

“The MPC noted the narrowing spread between the various foreign exchange segments of the market, indicating price discovery and improved market efficiency, thereby reducing opportunities for arbitrage and speculation.

“The Committee noted that increasing the level of external reserves would boost confidence in a more stable exchange rate and thus urged the Bank to investigate available avenues to improve inflows, particularly through diaspora remittances.

“Members also noted the Federal Government’s and the private sector’s efforts to improve domestic refining capacity, which is expected to save foreign exchange currently spent on imported refined petroleum products.

“The MPC noted the banking system’s continued resilience, as evidenced by improvements in key financial soundness indicators. Members emphasised the importance of continuing to monitor the system as the recapitalisation exercise is implemented.

“To build on the progress made thus far, the Committee reaffirmed its commitment to continuing with its tightening cycle in light of the urgent need to address inflationary pressures.”

“According to the National Bureau of Statistics, domestic headline inflation increased marginally to 34.19 per cent in June 2024 from 33.95 per cent in May 2024, driven by the continued rise in year-on-year food and core inflation.

Similarly, month-on-month headline inflation increased to 2.31 per cent in June 2024 from 2.14 per cent the previous month. The food and core components increased to 2.55 and 2.06% in June 2024, up from 2.28 and 2.01% in May.

“Real GDP (year-on-year) increased by 2.98 per cent in the first quarter of 2024, compared with 3.46 per cent in the fourth quarter of 2023, driven by both the oil and non-oil sectors.” Staff forecasts, on the other hand, indicate that the domestic economy will grow by 3.38 per cent in 2024, whereas the IMF predicts 3.1% growth.

“On July 18, 2024, external reserves stood at US$37.05 billion, up from US$34.70 billion at the end of June 2024. This represents eleven (11) months of import coverage for goods and services.

“According to the IMF, the global economy will grow by 3.2% and 3.3% in 2024 and 2025, respectively. The tight global financial conditions and ongoing geopolitical tensions associated with the wars in Gaza and Ukraine continue to be headwinds to the global projection, with both having a significant impact on commodity prices and the global supply chain.

“Global inflation is expected to decelerate marginally in 2024, but it may remain above the long-run targets of most advanced economy central banks.”