Again CBN raises interest rate to 26.25% to tame inflation

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the benchmark interest rate by 150 basis points, raising it from 24.75% to 26.25%.

This announcement was made by the CBN governor, Olayemi Cardoso, who also chairs the MPC. The decision came at the conclusion of the 295th MPC meeting held on Monday and Tuesday in Abuja.

Cardoso noted that while the Monetary Policy Rate (MPR) was raised, all other rates were maintained.

The MPC increased the MPR by 150 basis points to 26.25%, retained the asymmetric corridor around the MPR at +100/-300 basis points, kept the cash reserve ratio for Deposit Money Banks at 45%, and held the liquidity ratio at 30%.

Explaining the committee’s considerations, Cardoso stated, “The key focus of the MPC at this meeting remained achieving price stability by effectively using available monetary tools to control inflation.

Members observed that while year-on-year inflation in April 2024 rose moderately, the month-on-month headline food and core measures declined significantly.

This follows a similar decline in March 2024, indicating that the recent tight monetary stance is starting to yield results.”

However, Cardoso pointed out that inflationary pressures are still driven by food inflation. He cited several challenges hindering the effective control of food inflation, including rising transportation costs for farm produce, infrastructure constraints in the distribution network, security issues in food-producing areas, and exchange rate effects on imported food prices. The MPC called for enhanced security in farming communities to ensure increased food production.

Regarding the instability of the Nigerian currency, Cardoso attributed it to the free market system, noting, “Members observed recent volatility in the foreign exchange market, attributing this to seasonal demand and the dynamics of a freely functioning market system. The committee also noted a marginal increase in foreign reserves between March and April 2024.”

Since the MPC began meetings this year, this is the third consecutive rate increase. In total, the MPC has raised the MPR by 750 basis points since February.

The MPR was increased by 400 basis points to 22.75% in February, by 200 basis points to 24.75% in March, and now by 150 basis points to 26.25% in May.

The MPC has maintained a hawkish stance to combat Nigeria’s persistent inflation, which rose to 33.69% in April.

The National Bureau of Statistics reported a 0.49 percentage point increase in the April 2024 headline inflation rate compared to March 2024.

On a year-on-year basis, the headline inflation rate was 11.47 percentage points higher than in April 2023, when it was 22.22%. Food inflation was 40.53% in April 2024.

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Ahead of the MPC meeting, analysts predicted a rate hike in line with the CBN’s commitment to fighting inflation, with some projecting an interest rate of 25.75%, which the MPC exceeded.

Analysts at Meristem Research anticipated the MPC would raise rates to combat inflation, citing disinflationary trends in advanced economies and the sustained high-interest rates employed by monetary authorities globally.

They noted that Nigeria’s inflation rate rose to 33.69% in April 2024, driven by higher food prices and continued naira depreciation.

Similarly, analysts at Cordros Asset Management projected a 0.5% rate hike, highlighting concerns over overtightening and its potential impact on domestic growth.

They suggested the MPC faces a dilemma between continuing rate hikes to curb rising inflation or adopting a hold stance to observe developments and allow the effects of previous hikes to permeate the economy.