CBN Raises Interest Rate to 24.75% in an attempt to Tackle Inflation

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has announced a significant increase in the benchmark interest rate by 200 basis points, or 2%, according to an official statement issued today.

The Monetary Policy Committee's last decision resulted in a rise in the policy rate from 22.75% to 24.75%, a significant adjustment in response to current economic conditions. The action follows prior steps to control growing headline inflation, including a 4% rise in the benchmark rate implemented in February.

In addition to the interest rate adjustment, the CBN reduced the asymmetric corridor to +100 bps/-300 bps from +100 bps/-700 bps. Furthermore, while the cash reserve ratio (CRR) for deposit money banks (DMBs) remains at 45.0%, modifications have been made to increase the CRR for merchant banks to 14.0% from 10.0%, while the liquidity ratio stays at 30.0%.

The continued tightening of monetary policy is expected to raise borrowing costs across all sectors of the economy. This decision comes after a string of successive interest rate hikes over the last few months, demonstrating the committee's commitment to managing rising inflation pressures.

The decision to raise interest rates was informed by ongoing global and domestic economic uncertainties, coupled with elevated general price levels and the near-term inflation outlook. Exchange rate depreciation and its significant pass-through effects on core components were highlighted as key contributors to inflationary pressures, underscoring the need to prioritize strategies aimed at ensuring food security.

In response to the persistently high inflation levels, the committee emphasized the importance of implementing measures to support food security initiatives, including providing palliatives to farmers, releasing grains from reserves, and distributing fertilizers and farming implements ahead of the planting season.

The latest data from the National Bureau of Statistics revealed a further uptick in Nigeria's headline inflation to 31.70% year-on-year in February 2024, driven by increases in both food and core inflation indices. With inflationary pressures persisting, the committee remains vigilant in its efforts to mitigate the adverse effects on the economy.

As the CBN continues to navigate evolving economic challenges, the decision to raise interest rates underscores its commitment to maintaining price stability and supporting sustainable economic growth.

This latest policy adjustment reflects the CBN's proactive stance in addressing inflationary pressures and fostering macroeconomic stability in Nigeria's dynamic economic landscape.