Why CBN raises Interest Rate from 11.5 to 13 percent, retains other parameters

*The Central Bank of Nigeria’s Monetary Policy Committee has increased the Monetary Policy Rate,  and retained other policy parameters

*Experts argue the development would raise cost of funds for SME borrowers, impact their operating costs, production and profit margins.

Isola Moses | ConsumerConnect

The Central Bank of Nigeria (CBN) has raised the the country’s Monetary Policy Rate (MPR) to 13.5 percent do as to mop up excess liquidity ahead of the 2023 General Elections.

ConsumerConnect reports the Bank’s Monetary Policy Committee (MPC) disclosed this development Tuesday, May 24, 2022, after its two-day meeting.

Following the meeting, the Committee decided to hike the Monetary Policy Rate and retain other policy parameters the benchmark interest rate (MPR) which is the benchmark interest rate was raised by 150 basis points (bps) to 13.00 per cent from 11.50 percent.

It left the asymmetric corridor at +100/-700 bps around the MPR; retained the cash reserve ratio at 27.50percent and the Liquidity Ratio retained at 30.00 percent.

Dr. Muda Yusuf, Chief Executive Officer (CEO) of Centre for the Promotion of Private Enterprise (CPPE) said the development would raise the cost of funds for Small and Medium-scale Enterprises (SME) borrowers, impact their operating costs, prices of their products and profit margins.

Yusuf noted though there would be some adverse effects on the equities market, investors in the fixed income instruments may benefit from the hike, report said.

Meanwhile, Mr. Godwin Emefiele, Governor of CBN, briefing reporters at the end of the Committee’s meeting held the Bank’s headquarters in Abuja, FCT, said the sharp rise in inflation across both the advanced and emerging market economies has generated growing concerns among Central Banks as the progressive rise in inflation driven by rising aggregate demands and wage growth has put sustainable pressure on price levels.

It was the first time in two-and-a-half years that the policy-setting committee of the financial regulator would increase the MPR.

The MPR is the baseline interest rate in an economy while every other interest rate used within such an economy is built on it.

According to Emefiele, “Consequently, the major central banks, such as the US Fed, the Bank of England, European Central Bank, and Bank of Canada have provided strong guidance of a progressive shift away from monetary policy accommodation to drive market interest rate which may ultimately impact capital flows away from emerging market economies.”

The CBN Governor also explained that at the 285th meeting of the MPC, six out of the 11 members of the committee voted to raise the key rate.

The CBN Chief, therefore, urged the various banks in the country and the Federal Government to redouble efforts at supporting monetary authority.

It was gathered that the change in rates suggests the Bankers’ Bank has finally accepted the impact of inflation on its monetary policies.

Hitherto, the CBN was said to have preferred a policy that forced the government to look towards addressing supply bottlenecks, while believing lower interest rates could help spur lending and thus increase economic growth.

“While growth has continued to improve, members noted that inflation was confronted with upward pressure due to emerging risks within the domestic and external environment.

“The MPC, however, noted that the substantial upward push to price levels continued to be influenced by supply-side factors such as the scarcity of PMS, persisting insecurity and backlash from the Russia-Ukraine war.”

The Committee in a communique said: “These require a careful and focused policy intervention to address and resolve.

“In this light, the MPC, urged the Bank to continue using the tools at its disposal, while increasing its collaboration with the fiscal authority to ensure that inflation is adequately reined in and growth is returned to a strong and sustainable path.”

However, listing the key drivers of inflation, Dr. Yusuf also observed that liquidity challenges in the Forex market affected access to manufacturing and other inputs in the Nigerian economy, according to report.

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