The Central Bank of Nigeria (CBN) has implemented significant adjustments to its monetary policy stance, including a notable increase in the Monetary Policy Rate (MPR), which now stands at 24.75%, marking a 200 basis points rise from the previous rate of 22.75% set in February.
This decision was announced by Central Bank Governor, Mr. Olayemi Cardoso, following the conclusion of the Monetary Policy Committee (MPC) meeting on Tuesday.
While the MPR saw a substantial hike, the CBN opted to maintain the Cash Reserve Ratio (CRR) for commercial banks at 45%. However, the CRR for merchant banks was adjusted upward from 10% to 14%. Additionally, the liquidity ratio of banks remains unchanged at 30%.
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In a significant change to its policy framework, the CBN also modified the asymmetric corridor from +100/-700 to +100/-300 around the MPR. This adjustment aims to provide greater flexibility in monetary policy implementation while maintaining price stability.
Reacting to the decision, financial analysts expressed mixed views on its potential impact on the economy. While some welcomed the move as necessary to curb inflationary pressures, others raised concerns about its potential adverse effects on small and medium-sized enterprises (SMEs) and overall economic growth.
“As inflation is up the CBN has raised rates as expected. However, raising interest rates kills the local economy. The question today is how much economic growth can be sacrificed to reduce inflation,” Kalu Aja said.
Many economists have urged the central bank to lower interest rates, cautioning that further increases could exacerbate the slowdown in economic activities. They argue that high interest rates could constrain borrowing and investment, stifling economic growth and job creation.
The decision to hike interest rates occurred against the backdrop of a surge in broad money supply in Nigeria. As of February 2024, Nigeria’s broad money supply (M3) reached a historic high of N95.56 trillion, marking a staggering 79.29% increase from the previous year. This surge reflects a substantial year-on-year growth of N42.26 trillion and a 1.96% increase from the preceding month of January 2024 and has been fingered as a contributor to inflation.
In addition to the surge in broad money supply, Nigeria’s Money Supply (M2) also reached a historical high of N93.9 trillion in February, up from the previous record of N92.8 trillion established in January 2024. These developments denote the significant liquidity in the Nigerian economy, posing challenges for monetary policy management.
The trajectory of the broad money supply (M3) in Nigeria underscores its considerable upward momentum in recent years and reflects a key measure of economic liquidity. This metric includes both net foreign assets and net domestic assets and provides a comprehensive overview of the country’s monetary dynamics.
Ms. Emem Usoro, CBN Deputy Governor of the Operations Directorate, highlighted the correlation between broad money supply and inflation during the MPC meeting in January, noting that both have moved almost in tandem.
“Notably, broad money and inflation have moved almost in tandem as broad money supply (M3) expanded by 18.25% at the end of January 2024. This growth was ascribed to a rise in other deposits, transferable deposits, and securities other than shares, by 26.55%, 4.73%, and 99.98%, respectively.
“From the asset side, Net Domestic Asset (NDA) contributed significantly to broad money growth while Net Foreign Asset (NFA) subdued growth in broad money. The steady rise in inflation has resulted in negative real interest rates,” she said.
Meanwhile, the CBN has directed deposit money banks in the country to expedite actions to increase their capital base. Cardoso emphasized the importance of strengthening the financial system against potential risks, urging banks to accelerate their recapitalization efforts.
He said although the MPC also reviewed developments in the banking system and noted that the industry remains safe, sound, and stable, there is a need for the bank to sustain its surveillance and ensure compliance of banks with existing regulatory and macro-potential guidelines.
“The MPC also enjoined the banks to expedite actions on the recapitalization of banks to strengthen the system against potential risks in an increasingly globalized world,” he said.
It would be recalled that in November 2023, at the 58th Annual Bankers’ Dinner of the Chartered Institute of Bankers of Nigeria (CIBN), Cardoso announced the CBN’s intention to embark on a new round of bank recapitalization for Deposit Money Banks (DMBs).
Addressing the Policy Advisory Council on the National Economy, Cardoso highlighted President Bola Ahmed Tinubu’s ambitious target of achieving a Gross Domestic Product (GDP) of $1 trillion by 2030. This target underscores the government’s commitment to drive economic growth and development over the next decade.
Cardoso emphasized the need to recapitalize the banks so that they can play their role in developing Nigeria’s economic growth over the next seven years.