At the 297th Monetary Policy Committee (MPC) meeting at the Central Bank of Nigeria (CBN) headquarters in Abuja, governor, Olayemi Cardoso, announced changes to tighten monetary policy further.

In a unanimous decision, the MPC announced that the Monetary Policy Rate (MPR), the country’s key interest rate, was raised by 50 basis points to 27.25%, up from 26.75%. In a move that mirrored the tightening noose around liquidity, the committee also raised the cash reserve ratio (CRR) for deposit money banks by 500 basis points to 50%. For merchant banks, the CRR saw a smaller but still significant increase of 200 basis points, moving from 14% to 16%. The liquidity ratio was kept steady at 30%.

The decision was made despite expectations that the CBN would reduce the MPR rates following the decline in inflation rates in the past two months.

Cardoso’s opening remarks set the tone, reflective of the tightrope Nigeria’s economy currently walks.

The committee was unanimous in its decision to further tighten monetary policy and thus decided as follows:

• Raise the MPR by 50 basis points to 27.25% from 26.75%,
• Retain the asymmetric corridor around the MPR at +500 to -100 basis points,
• Raise the cash reserve ratio of deposit money banks by 500 basis points to 50% from 45% and merchant banks by 200 basis points to 16% from 14%,
• Retain the liquidity ratio at 30%.

The CBN’s latest policy shift is another step in its effort to contain the economic fires that have been burning for years. While headline inflation showed some easing in July and August of 2024, Cardoso was quick to caution that core inflation remained a stubborn adversary.

“The committee was however unanimous in recognizing 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,” Cardoso added.

It was clear that inflation while easing in certain categories, had not been fully tamed. Food prices showed signs of moderation, but the escalating costs of energy have continued to place pressure on consumer prices. The governor indicated that the economic relief expected from slowing inflation may be derailed by rising energy costs and the broader volatility in global energy markets.

However, while these measures are seen as necessary steps to curb inflation and stabilize the naira, economists have warned that raising the interest rate will not curb Nigeria’s inflation. They noted that the MPC’s decision to raise interest rates and increase the cash reserve ratio will have far-reaching consequences for Nigeria’s economy. This is because, the higher MPR is likely to push up borrowing costs for businesses and consumers alike, making credit more expensive and potentially dampening investment.

FX Crisis and Oil Output

Central to Cardoso’s address was the unrelenting pressure on the naira and the broader foreign exchange (FX) challenges that have plagued Nigeria for years. Also, the country’s dependence on oil as its primary source of foreign exchange earnings has created a vulnerability that Cardoso did not shy away from addressing. He offered a stark reality check to the nation about the limitations of the Central Bank’s role in solving the country’s FX woes.

“I must tell you that, inasmuch as the strategy of the Central Bank is to unlock as many diversified sources as possible into the foreign exchange area, it is not enough. It can never take the place of fundamentals—never. We may like to think it can, we may like to dream it can, but it can’t,” he warned.

He clearly stated that the FX crisis is not just a monetary issue, but one deeply rooted in Nigeria’s structural economic failings.

Cardoso further emphasized the need for increased oil production as a non-negotiable part of stabilizing the economy.

“Until the fundamentals are fixed and in place, you will continue to sub-optimize. Oil production has to be ramped up to the level that will carry the economy, and I think we’re all witnesses to the efforts that are being made in that sector. It has to happen,” he said.

The governor’s critique didn’t stop at oil. He also lamented the country’s overreliance on imports and the pressing need for economic diversification.

“Non-oil exports—and I spoke about the sad situation that we, as Nigerians, face today—whereby we are a monolithic economy. As long as we are a monolithic economy, the constraints to having the strong exchange rate that we all desire will continue to be hampered,” he said.

“Our taste for foreign goods also must be calibrated accordingly. These are all things that will essentially determine where we settle with respect to our foreign exchange rates. As I said, we may want to wish it away, but it’s not going to go away,” he added.

Inflation, Energy Prices, and Food Security

Inflation in Nigeria has been driven by a myriad of factors—chief among them, the removal of fuel subsidies and the floating of the FX market.

The MPC recognized that the solution to Nigeria’s inflation problem would not come from monetary policy alone. The committee reiterated the need for close collaboration with fiscal authorities to address rising energy prices, which have been a major contributor to inflation.

Cardoso pointed to challenges such as flooding and security concerns in farming communities, both of which have contributed to food inflation in the country.

However, the committee also expressed hope that the full operations of Dangote Refinery would bring some much-needed relief, especially in terms of transportation costs. The expectation is that once operational, the refinery will help lower the cost of fuel imports, leading to reduced transport costs and, by extension, easing food inflation.

While Cardoso noted the limitations of monetary policy in addressing the structural problems that continue to plague Nigeria’s economy, he assured that the CBN will do its best to see that the headwinds are contained.

“The Central Bank is determined to play its part in ensuring that the markets operate efficiently. Those who game the market, if we catch them, they will pay the price, but that will not substitute for the fundamentals,” Cardoso said.

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