CBN Rates Hike To Boost Investor Confidence, Attract Capital Flows- Cardoso


In a move that far outpaced analysts expectation, the Central Bank of Nigeria (CBN) concluded its much awaited two-day Monetary Policy Committee meeting, with members voting to further tighten monetary policy, jerking up the benchmark policy rate by 400 basis points to 22.75% from 18.75%.

The 12-member committee also  adjusted the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points, raising the Cash Reserve Ratio from 32.5% to 45%; while retaining the Liquidity Ratio at 30%.

Decision at the meeting, the first for the year and under the new leadership of the apex bank, according to Olayemi Michael Cardoso, chairman of the committee and CBN Governor, is in recognition of “the need to continue to put in place measures to boost investor confidence and to attract capital inflows.”

The committee, he said, will however “continue to monitor developments in the global and domestic economies to ensure that inflationary and exchange rate pressures moderate in the near term.

It is perhaps in the committee’s bid to monitor these development, especially with inflation in January hitting 29.90% year-on-year, from the 28.92% reported in December 2023, which he said, is why the MPC has scheduled another meeting  at the end of next month.

According to the latest data by the National Bureau of Statistics (NBS), headline inflation was driven by food inflation which increased to 35.41% from 33.93%

“The major factors driving inflationary pressure remain exchange rate pass-through, rising cost of energy, high fiscal deficits, and lingering security challenges in major food-producing areas.”

Other global factors, he said, include “tight financial conditions and trade disruptions from ongoing geopolitical tensions, remain significant upside risks to the outlook for domestic inflation. Staff forecasts therefore indicate that inflation will remain on an upward trajectory in the near term before commencing a descent.”

The committee’s decisions, the Governor continued, were informed by the current inflationary and exchange rate pressures, amid concerns “about the persistent rise in the level of inflation and emphasized the committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation.”

There was, however, an acknowledgement of “the trade-off between the pursuit of output growth and taming inflation, but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation.

Members, he added, “noted the decision to transit to an inflation targeting framework as essential to addressing the persistence of inflationary pressures in the economy and commended the fiscal authority for their invaluable support.”

Options available for decision, the committee noted, was whether to hold or hike the policy rate to offset the persisting inflationary pressure, arguing that previous decisions to hike, going by evidence, constrained inflationary pressure, even if not to a desirable extent.

Among non-monetary factors driving inflation, the committee noted, are the

persisting insecurity across the country, and infrastructural deficits, while noting the role of fiscal policy in addressing these shortfalls. Members reiterated the commitment of monetary policy support, while applauding fiscal policy initiatives to reduce the cost of living of ordinary Nigerians, including the ongoing efforts to improve food supply and provide mass transit CNG buses to ease the cost of transportation. The civil service reforms announced, the committee said, would improve the efficiency of government amongst others.

After considering various scenarios of hold and hike, the committee “concluded that, inflation could become more persistent in the medium-term and thus pose more regulatory challenges if not effectively anchored. The  balance of the argument thus leaned convincingly in favour of a significant policy rate hike to drive down inflation substantially.”

It listed some of the reform measures as the the unification of the foreign exchange market; promotion of a willing buyer willing seller market; removal of all limits on margins for IMTO remittances; introduction of a two-way quote system and the broad reforms in the BDC segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market (NAFEM).”

While reviewing the key financial indicators of the nation’s banking system, the committee noted that although the system remained stable, there is need to further enhance the stability of the system, hence the need for banks to recapitalize to improve their resilience against potential risks.

Members further enjoined the CBN to strengthen surveillance and compliance as per its earlier guidance on the application of foreign exchange revaluation gains.