298th MPC: CBN expected to raise interest rates as inflation surges

• The Central Bank of Nigeria is expected to hike the interest rate further to rein in inflation
• Nigeria’s inflationary pressures have defied the CBN’s rate hike strategy
• Interest rate hikes have implications for the broader economy

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to vote for a further interest rate hike at its 298th meeting, which is scheduled to be held on Monday and Tuesday, November 25 and 26.

This is predicated on the CBN’s antecedent of hiking interest rates in the hopes of taming inflation, which has continued to soar.

Since Olayemi Cardoso took over as governor of the CBN over a year ago, the MPC has maintained a tight stance on its monetary policy in the hopes of taming soaring inflation.

The committee has so far hiked interest rates five times since the beginning of the year. At the 297th MPC meeting, the committee decided to increase the Monetary Policy Rate (MPR) by 50 basis points (bps) to 27.25 per cent from 26.75 per cent in July.

The committee also decided to retain the asymmetric corridor around the MPR at +500/-100 basis points, raised the Cash Reserve Ratio (CRR) of Deposit Money Banks by 500 basis points to 50.00 per cent from 45.00 per cent in July and that of Merchant Banks by 200 basis points to 16 per cent from 14 per cent, while retaining the Liquidity Ratio (LR) at 30.00 per cent.

Cardoso said the interest rate hike consolidates the gains recorded with previous rate hikes, as core inflation has remained elevated, driven primarily by rising energy prices. 

He maintains that the apex bank is cautious about lowering the interest rate, noting that though central banks around the world are lowering interest rates, the CBN’s approach is “a lot more measured” and considering the Nigerian context to avoid the inflation rate getting out of control.

But inflation has defied CBN’s rate hikes

Despite the CBN’s monetary tightening stance, which aims to tame inflation and halt excess liquidity, inflationary pressures have continued unabated.

Nigeria’s inflation rate has been on a steady rise. It rose from the 22.4 per cent President Bola Tinubu’s administration met in May 2023 to a new 28-year all-time high of 34.19 per cent in June.

It decelerated to 33.40 per cent in July after 19 months of increase and declined further for the second consecutive month in August to 32.15 per cent before increasing to 32.70 per cent in September 2024.

As of October 2024, Nigeria’s inflation rate increased to 33.88 per cent, driven by higher energy costs and increased food prices due to insecurity and flooding in most food-producing states of the country.

Sustained rate hikes have implications for the broader economy

Though interest rate hikes have become the CBN’s go-to strategy to curb inflation, they have implications for the broader and already fragile economy. Analysts and economists perceive the CBN’s strategy as detrimental to investment, economic growth and business operations.

Apart from banks and other financial institutions whose net interest income has more than doubled since the last interest rate hike, other sectors, especially manufacturing, are unhappy with the CBN’s strategy.

Increased interest rate means businesses will pay more interest on loans, and with already high input costs, the pass-through effect will be felt by consumers who will pay more for goods and services.

After the last interest rate hike, the National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Dele Kelvin Oye, said the decision would further burden businesses with higher loan costs and has failed to curb inflation or stabilise the naira.

On its part, the Centre for the Promotion of Private Enterprise (CPPE), through its Director/CEO, Dr Muda Yusuf, said the decision will further exacerbate the already harsh operating environment for businesses and discourage investments in the country

Beyond increasing MPR, how else can CBN tame inflation?

Meanwhile, TheRadar reported that at its 296th Monetary Policy Committee (MPC) meeting, the Central Bank of Nigeria (CBN) increased the Monetary Policy Rate (MPR) by 50 basis points to 26.75 per cent from the May rate of 26.25 per cent to tame inflation.

TheRadar highlighted other ways the apex bank can tackle inflation beyond increasing interest rates, which some Nigerians describe as ‘textbook economics.’