Monetary Policy Committee (MPC) of the CBN at the end of its 296th bi-monthly policy meeting has raised the benchmark policy rate (MPR) by 50bps to 26.75%, marking the fourth increase in 2024. The committee also tweaked the asymmetric corridor around the MPR to +500/-100bps from +100/-300bps previously. Meanwhile, other parameters; Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) for deposit money banks were left unchanged at 45.0% and 30.0% respectively. The Governor of the CBN, Mr. Olayemi Cardoso, announced this at the end of the apex bank’s 296th MPC meeting held in Abuja. Speaking on the reason for the 50-basis point hike, Mr. Yemi Cardoso, Chairman of the Monetary Policy Committee (MPC), said that recent events in the economy, such as inflation and the need to stabilise the foreign exchange market, as a rationale for the increase.
He further referenced recent policies of the federal government to import specific staple foods such as rice, maize, and wheat to help stem the rising food inflation but warned that the timeline should be followed in order not to stifle the gains made in local food production. Additionally, Mr. Cardoso praised the convergence between the official exchange rate and that of the parallel market as part of efforts to reduce arbitrage in that sector. The 50 basis points increase to the interest rate would be the fourth consecutive increase in interest rates by the Central Bank in 2024 and continue from similar MPR hikes in 2023. Also, the recent hike totals a cumulative 800 basis points hike in MPR since Mr. Olayemi Cardoso took over the reins of the apex bank. This has seen the benchmark interest rate rise from 18.75% to 26.75%. The apex bank in February increased the MPR by 400 basis points. This was followed by another 200 basis points and then 150 basis points before the latest increase. While the reason for the hike in interest rates by the CBN seems genuine, members of the public, especially the business community, seem to be negatively affected as the cost of accessing capital has skyrocketed and they have voiced their concerns. Popular among them is Africa’s richest man, Alhaji Aliko Dangote, who stated that no economic growth would occur, nor would jobs be created, if interest rates from banks stay at 30%. Additionally, the Nigerian Association of Chambers of Commerce, Industries, Mines, and Agriculture (NACCIMA) has said that the monetary policy tightening by the CBN contributes to inflation rather than reduces it.
But the committee expressed optimism that inflation may peak in the near term due to previous tightening measures and reduced external market pressures. However, the committee was concerned about the increase in the headline rate to 34.2% in June, largely driven by food inflation. Sequel to this, the MPC positively appraised the recent move by the FG to allow for a 150-day imports-free window for selected food items to help temper food inflation. The CBN is apparently dissuading banks from tapping liquidity through the Standing Lending Facility (SLF) window. For context, the tweak in the asymmetric corridor to +500/-100bps around the MPR implies that banks seeking to tap funds through the SLF window would have to pay a cost of fund of 31.75% per annum from 27.25% previously. Meanwhile for banks with excess liquidity willing to play at the Standing Deposit Facility (SDF) window would only receive 25.75% interest per annum, thereby expanding the negative spread between SLF and SDF to 600bps from 400bps. Based on our assessment of industry data, banks tapped ₦73.6tn through the SLF window between January and July 2024, representing 8.5x the size of activities at the SDF window. We expect pressure to mount on banks’ ability to balance risk-return going forward.
The further hike in the MPR (though arguably compelling) should exert a negative pass-through effect on real sector players, especially in terms of interest expenses on debt funding. Therefore, coupled with the other headwinds such as inflation squeeze and FX volatilities, we expect real output growth to be pressured for the rest of the year. There are reservations with CBN’s optimism that the 150-day duty-free import window for selected food items would substantially temper food prices. Without the FG addressing the rising cost of logistics fuelled mainly by elevated energy prices and insecurity, the impact of such policy would be short-lived, at best. Furthermore, there has also not been any formal model announced to show how the beneficiaries of the duty-free window would be monitored to sell the staple items at fair prices across the country.
