Why MPC increases benchmark interest rate to 18.75 percent –CBN

*The Monetary Policy Committee of the Central Bank of Nigeria explains the Bank’s decision to increase the country’s benchmark interest rate (MPR) to 18.75 percent from 18.5 percent was informed by the rising inflation in the economy

Isola Moses | ConsumerConnect

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the country’s benchmark interest rate (MPR) to 18.75 percent from 18.5 percent, representing the highest interest rate in 22 years.

ConsumerConnect reports Mr. Folashodun Shonubi, Acting Governor of CBN, disclosed this development at a media briefing Wednesday, July 26, 2023, following the two-day MPC meeting.

The last meeting was the first MPC meeting under President Bola Ahmed Tinubu’s administration, and one chaired by Acting CBN Governor Shonubi, following the suspension of Mr. Godwin Emefiele as Governor of CBN.

Other MPC decisions include narrowing the asymmetric corridor to +100/-300 basis points around the MPR from +100/-700 basis points.

CRR was retained at 32.5 percent and the liquidity Ratio was also kept at 30 percent.

Rationale for hike in MPR

The MPC also noted that the decision to further increase interest rates was informed by the rate of rising inflation in the country.

Nigeria’s headline inflation surged to 22.79 percent June 2023, which is the highest rate since September 2005.

It is noted this decision is coming despite multiple interest rate hikes by the CBN in the last 14 months in the economy.

Inflation is expected to increase further on the back of the twin effects of petrol subsidy removal and the convergence of the exchange rate, according to report.

Since the CBN switched the gear to a hawkish stance May 2022, the interest rate has increased by 725 basis points from 11.5% to 18.75%, while inflation has moved from 17.71% to 22.79%.

Shonubi also stressed the hike in interest rate would help narrow the negative real rate of returns as well as encourage foreign investments.

As regards the effectiveness of a continuous rate hike, the Acting Governor of CBN further noted: “It has made quite a lot of difference, and I believe in previous MPC’s, we had to indicate and show that every time we have had a rate increase, it has actually moderated the rate of inflation.

“We agreed that one of the key challenges now was a liquidity overhang and we needed to look at the various tools we had.

“We’re looking at every tool in the box that would help us reduce liquidity and that should have a positive impact on reading in inflation.”

CBN not unifying interest  rates: Shonubi

In respect of the considerable gap between the official I&E Window and the parallel market rate, Shonubi said the CBN was not trying to unify any rates.

He clarified “we believe that we need to encourage the market to be more efficient and to be more effective and that takes a bit of time.

“Some of the volatility you’ve seen over the period have been driven by the fact that the market needs to find its level and also the reality that there’s pent up demand which current supply may not be sufficient for.”

The Acting CBN Chief stated: “As we ease and satisfy the pent up demand, we begin to see more efficient markets that runs.

“But you also need to understand that the dynamics of pricing in the market.”

He said: “We feel we should actually stop calling it I& E window because it is now much more than the I & E for us.

“It’s a market where everybody and anybody through the licensed institutions can participate.

“So we expect that overtime sooner rather than later, the volatility as seen would normalise.”

Banking sector regulator ensures market stability

According ti Shonubi, the role of the Central Bank of Nigeria is to intervene and keep the market at a fairly stable level.

He explained: “We have our views as to what that level is and as the market continues to oscillate around that level, if there’s a need for us to intervene either by buying or selling, We will continue to do so.”

Availability of redesigned Naira notes

In connection with the availability of more of redesigned banknotes in circulation, Shonubi clarified that the old Naira notes are expected to go through a number of cycles, and then over time, will become worn out and then would be replaced.

“We believe that we have an optimal level of the currency out.

“So, what’s being done is replacement to keep the level rather than just putting money out there.

“And that is seen by the fact that the banks, whenever they come to us for notes, we provide it to them.

“If it wasn’t enough, they would be asking us for much more. If it was too much, they’ll be dumping that much more,” he stated.

According to him, overtime, Nigerian consumers will see that the whole notes are replaced out of the system with the new banknotes.

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