- Amid Concerns Over High Fiscal Deficit, Core Inflation
Members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) rose from the two-day 297th meeting on Tuesday, September 24, 2024, voting unanimously to raise the benchmark Monetary Policy Rate (MPR) by 50 basis points from 26.75% to 27.25%.
The meeting attended by 11 of the 12 members also agreed, following a review of recent economic and financial developments as well as assess risks to the outlook, as part of further tightening policy, “retain the asymmetric corridor around the MPR at +500/-100 basis points.”
The Cash Reserve Ratio of Deposit Money Banks, according to the communique issued at the end of the meeting and signed by Olayemi Cardoso, the CBN Governor, was however raised by 500 basis points to 50% from 45%, while that of merchant banks was increased by 200bps to 16%, from 14%; and retaining the Liquidity Ratio at 30%.
The decision to raise rates despite the marginal decline in headline inflation as published by the the country’s National Bureau of Statistics (NBS), according to the communique issued at the end of the meeting, arose, members noted, from the fact that the real policy rate still remains negative.
If the economy must be attractive to investors, the MPC said efforts must be sustained to achieve a positive real interest rate, thereby making it competitive for international capital, a situation that would improving the exchange rate.
The decision also followed a a review of the upside risks to price development and the downside risks to the recovery of output growth, hence the option to tighten policy further, thereby safeguarding the gains already accrued in moderating inflationary pressure.
The decision also followed the committee’s deliberation “on the optimal policy option to sustain the downward trend in price development, contain emerging risks to inflation, stabilize the exchange rate and safeguard the banking system while also shielding the recovery of output growth.”
While noting the moderation in headline inflation year-on-year in July and August 2024, members acknowledged “the relative stability and convergence in the exchange rate across the various market segments, resulting from the bank’s tight monetary policy stance.”
This, they expect, would boost confidence needed for economic agents to plan in the medium to long term, even as it recognised unanimously “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.”
The uptrend in core inflation, the CBN agreed, poses severe concerns, as it clearly indicates the persistence of inflationary pressures, following which “members reiterated the need to work in close collaboration with the fiscal authority to address the current upward pressure on energy prices. The MPC noted the continued growth in money supply, recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.
Members equally expressed concern “about the growing level of fiscal deficit, but acknowledged the commitment of the fiscal authority not to resort to monetary financing through Ways & Means.
The committee, furthermore, observed a strong correlation between the monthly distribution of funds among the three-tiers of government by the Federation Accounts Allocation Committee (FAAC) and liquidity levels in the banking system, as well as its impact on the exchange rate.
It therefore agreed to increase monitoring of future releases with a view to addressing its effects on price developments.
On food inflation, the MPC blamed it on such upside risks remained flooding, hike in energy prices, scarcity of premium motor spirit or petrol, leading to long queues across the country, and most importantly, insecurity in farming communities.
Considering the weight of food in the CPI basket, members recognized efforts by the Federal Government in addressing insecurity in farming communities and stressed the need to remain steadfast.
It also applauded the ongoing effort to bridge the food supply deficit through the duty-free import window for food commodities, while expressing confidence that the lifting of refined petroleum products from Dangote refinery will moderate transportation costs and significantly support the easing of food price pressures in the short to medium term.
This, it noted, is also expected to moderate foreign exchange demand for importation of refined petroleum products, with a positive spillover on external reserve and improvement in the overall balance of payment position.
Assessing the performance of key financial soundness indicators, the committee noted with satisfaction that despite familiar headwinds, the nation’s banks remain safe, sound, and stable.
However, it emphasized the need to sustain supervisory oversight on the industry to strengthen its continued support to the economy.