CBN increases interest rate to 18.75%, retains other ratios

The Monetary Policy Committee (MPC) members of the Central Bank of Nigeria (CBN) on Tuesday voted to increase its Monetary Policy Rate (MPR) to 18.75 per cent from 18.50 per cent.

The members at the end of the two-day meeting in Abuja voted to adjust the asymmetric corridor to +100/-300 basis points around the MPR; retain the CRR at 32.5 per cent; and retain the liquidity ratio at 30 per cent.

The acting Governor, CBN, Folashodun Shonubi after the meeting said: “Following the outlook for the domestic economy, members were of the view that the Committee was confronted with only two policy options, to hold or hike the policy rate to offset the moderate increase in headline inflation.

“Considering the option to hold, the Committee reviewed the impact of the continued rise in inflation on various macroeconomic variables, noting the potential dampening effect on output growth. Members agreed unanimously that the previous series of rate hikes had indeed greatly moderated the pace of price increases.

“The option to continue to hike the policy rate, albeit moderately, also presented a strong alternative. This is premised on the expected liquidity injections into the economy from the recent policy developments and the likely impact on inflation.

“The Committee remained cautious in arriving at a policy decision as Members noted the need to continue to support investment which will ultimately lead to the recovery of output growth. The balance of these arguments thus, leaned in favour of a moderate rate hike, to sustain efforts at anchoring inflation expectation, narrow the negative real interest rate gap, and improve investor confidence.

“The MPC, thus, resolved by a majority vote to raise the Monetary Policy Rate (MPR). A ttotal of six members voted to raise the MPR: four Members by 25 basis points and two members by 50 basis points. Five members voted to hold the MPR constant. All Members voted to narrow the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.”

He noted that the committee’s considerations focused on the persistent rise in inflation and its potential adverse effect on output growth and household income.

“The continued uptick in inflation (month on month), driven by increase in both the food and core components of the CPI, in the view of members, remained a key challenge. The members also expressed concerns that the recent policy decisions around subsidy removal, exchange rate liberalization and disbursement of palliatives, would have pass-through effects to inflation. Members therefore called for decisive measures, by the Bank, to address the likely liquidity surfeit from these developments, including using appropriate monetary policy instruments

“The Committee urged the monetary and fiscal authorities to sustain its collaboration towards addressing the inflationary pressure and incentivise domestic investment to reduce unemployment and boost output growth. It enjoined the Federal Government to continue to explore policies to improve investor confidence in the Nigerian economy and pave way for foreign and domestic investments.

“Members emphasized the need to attract investments, particularly, to auto manufacturing, aviation, and rail industries to boost non-oil revenues. The Committee, thus, expressed the view that, key policy mechanisms to shield the Nigerian economy from persisting global shocks and other emerging domestic shocks, are urgently required for the economy to continue to post positive growth.

“The Committee also recognized the several measures put in place by the Bank to boost foreign exchange liquidity. Particularly, Members were of the view that the recent policy on foreign exchange market reform would increase market transparency and encourage more foreign capital inflows. It, therefore, urged the Bank to leverage on effective policies to attract remittances from diaspora to help moderate exchange rate pressures.

“The Committee commended the Bank’s role in the effective oversight of the banking system, evidenced by the relative stability in key financial soundness indicators and resilience of the sector, despite tight global and domestic financial conditions. Members, however, noted the potential impact of the recent policy reforms on financial system stability and called on the management to act proactively to ringfence the banking system from any possible second-round effects. The MPC, thus, urged the Bank to sustain its macro-prudential surveillance over the banking system,” he added.