Inflation: MPC Raises Interest Rate By 27.25%

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), has raised the Monetary Policy Rate (MPR) by 50 basis points to 27.25 per cent from 26.75 per Cent.

The the communique of the meeting read by the CBN Governor,  Olayemi Cardoso said the Committee was unanimous in its decision to further tighten policy.

“The committee was unanimous in its decision to further tighten policy and thus decided as follows, one: raise the MPR to 27.25 per cent,” Cardoso said.

The committee went further to raise the Cash Reserve Ratio (CRR) by 50 basis points from 45% to 50% for Deposit Money Banks (DMBs) and from 14% to 16% for Merchant Banks.

Liquidity Ratio (LR) at 30% and the Asymmetric Corridor at +500/-100 basis points around the MPR was retained by  MPC.

The committee unanimous agreed  that a lot more is  required to actualize the Bank’s price stability mandate. The MPC noted that  even though headline inflation trended downwards due to a moderation in food  inflation, core inflation has remained elevated, driven primarily by rising energy  prices. The uptrend poses severe concerns to Members, as it clearly indicates the persistence of inflationary pressures. Members thus, reiterated the need to  work in close collaboration with the fiscal authority to address the current  upward pressure on energy prices. The MPC noted the continued growth in  money supply, recognising the need to curtail excess liquidity in the system as  well as address foreign exchange demand pressures. Members were also concerned about the growing level of fiscal deficit but acknowledged the  commitment of the fiscal authority not to resort to monetary financing through  Ways & Means. Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impact  on the exchange rate. The Committee, therefore, agreed to increase  monitoring of future releases with a view to addressing its effects on price developments.

The committee noted that the  upside risks remained flooding, hike in energy prices,  scarcity of PMS and most importantly, insecurity in farming communities. Considering the weight of food in the CPI basket, Members recognized the  efforts of the Federal Government in addressing insecurity in farming  communities and stressed the need to remain steadfast. In addition, the MPC applauded the ongoing effort of the Federal Government to bridge the food  supply deficit through the duty-free import window for food commodities.

The  Committee was of the view that lifting of refined petroleum  products from Dangote refinery will moderate transportation costs and  significantly support the easing of food price pressures in the short to medium  term. This is also expected to moderate foreign exchange demand for  importation of refined petroleum products, with a positive spillover on external  reserve and improvement in the overall balance of payment position.

“Members assessed the performance of key financial soundness indicators and  noted with satisfaction that despite familiar headwinds, the banking industry  remains safe, sound, and stable. The Committee, however, emphasized the  need to sustain supervisory oversight on the industry to strengthen its  continued support to the economy.

“Following these considerations, Members deliberated on the optimal policy  option to sustain the downward trend in price development, contain emerging   risks to inflation, stabilize the exchange rate and safeguard the banking system  while also shielding the recovery of output growth. In addition, Members noted  that the real policy rate remains negative even after the recent moderation in  headline inflation. To attract investments into the economy, efforts must be  sustained to achieve a positive real interest rate. This would enhance the  economy’s competitiveness for international capital, thereby improving the exchange rate. Following a review of the upside risks to price development and the downside risks to the recovery of output growth, the Committee opted to  tighten policy further, to safeguard the gains already accrued in moderating inflationary pressure.”