Updated September 27, 2022
Rising inflation in Nigeria is informing an upward review of interest rates. There has been a palpable increase in the prices of goods and services in recent time. The Central Bank of Nigeria (the “CBN”) is now taking steps to address the situation and to maintain price stability[1]. One of the steps the CBN has taken to is to increase the Monetary Policy Rate, by 150 basis points, from 11.5% to 13%.[2] It appears that all the members of the Monetary Policy Committee[3], agreed that the Monetary Policy Rate was due for an increase. The debate seemed to be around the rate of the increase. On July 19, 2022, for the second time in the year, the MPC hiked the Monetary Policy Rate by 100bps to 14.00%. On September 27, 2022, the MPC further hiked the Monetary Policy Rate by 1.5% to 15.50%
Why is there a Sharp Increase in Prices?
According to the CBN, here are some of the material causes of rising inflation in Nigeria:
- rising energy prices associated with the epileptic supply of Premium Motor Spirit (PMS);
- high cost of Automotive Gas Oil (AGO), mostly used in transportation and production;
- progressive hike in electricity tariffs;
- persisting security challenges in major food-producing areas;
- legacy infrastructural problems which continue to hamper food supply logistics and storage across the country;
- steady overall wage growth;
- an increase in money supply in the Nigerian economy. Meaning, there is now too much money (cash/credit) in circulation relative to the size of the Nigerian economy[4]. Broad money supply (M3) rose significantly to 6.22 per cent in April 2022, compared with 4.19 per cent in March 2022;
- The CBN fears that there would be additional increase in the money supply until the conclusion of the 2023 general elections in Nigeria; and
- The CBN fears that the war in Ukraine, the resurgence of Covid in China and the increase in sovereign debt can worsen also the price increases in Nigeria
Here is how much the CBN is spending on boosting the Nigeria Economy
What is the Monetary Policy Rate? How is CBN hoping to Curb Rising Inflation?
The Monetary Policy Rate sets the tone for the loan market and for the returns profile equity investors expect to see. The Monetary Policy Rate is the interest rate a central bank charges commercial banks for loans. In practice, the Monetary Policy Rate (also known as the bank rate or base interest rate) serves as a minimum or base interest rate below which commercial banks do not lend to their own customers. In reality, the interest rates that commercial banks charge their customers is usually a sum of the Monetary Policy Rate plus a suitable spread which generally depends on the credit risk premium.
From a central banking perspective, setting a benchmark interest rate helps to enhance transparency in the loan market. The Monetary Policy Rate can also be used by central banks to reduce the amount of money in circulation, effectively making it more expensive for firms and households to borrow money from banks., thereby curbing rising inflation. For instance, at its meeting ending on 4 May 2022, the Monetary Policy Committee of the Bank of England voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points, to 1%. The U.S. Federal Reserve also increased its benchmark interest rate by half a percentage point. The expectation of the CBN is that the new interest rate, will curb consumption, reduce demand and by that token stabilise prices.
Other key Updates from the Monetary Policy Committee Meeting of May 24, 2022
- The MPC voted to retain the asymmetric corridor at +100/-700
- The MPC voted to maintain the Cash Reserve Ratio at 27.50%
- The MPC voted to retain the Liquidity Ratio at 30.00%
Other Key Updates from the Monetary Policy Committee Meeting of July 19, 2022
- The MPC voted to retain the asymmetric corridor at +100/ -700
- The MPC voted to maintain the Cash Reserve Ratio at 27.50%
- The MPC voted to retain the Liquidity Ratio at 30.00%
Our Comments
We fully expect the CBN to consider a mix of both monetary policy and fiscal interventions to curb rising inflation in Nigeria. Like other policy decisions, monetary policy decisions have to be data-driven. In so far as the interest rate hike is informed by clean and accurate data, its hardly useful to fault CBN’s new interest rate hike. In our view, the interest rate hike is intended to achieve the greater public good.
Updated on July 19, 2022
[1] Monetary and price stability is the primary function of the CBN as per section 2 of the CBN Act
[2] The decision was in fact a close call. Six (6) members voted to raise the MPR by 150 basis points, four (4) members by 100 basis points, and One (1) member by 50 basis points.
[3] The MPC is a creature of statute as per section 12 of the CBN Act
[4] Inflation is the rate of increase in prices over a given period of time. Regardless of the type of goods, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, typically, a year.
