In Aggressive Bid to Tame Inflation, CBN Raises MPR to 15.5%
•Hikes CRR to 32.5% to check currency speculation, orders banks to make adjustments
•Emefiele: N9trn injected into economy in three years
•Says no assurance on monetary easing yet, promises additional intervention in aviation
James Emejo and Nume Ekeghe in Abuja
The Central Bank of Nigeria (CBN) yesterday raised the Monetary Policy Rate (MPR), otherwise known as interest rate, by 150 basis points, to 15.5 per cent from 14 per cent.
The CBN also raised banks’ Cash Reserve Requirement (CRR) by 750 basis points to a minimum of 32.5 per cent, from 27.5 per cent, in order to mop up liquidity from banks’ vaults and discourage currency speculation.
The apex bank, however, left the Liquidity Ratio (LR) unchanged at 30 per cent.
MPR is the benchmark rate at which the CBN lends to commercial banks, and it often determines the cost of credit in the economy.
Addressing journalists after the meeting of the Monetary Policy Committee (MPC) in Abuja, CBN Governor, Mr. Godwin Emefiele, said the latest changes were part of the bank’s aggressive effort to rein in inflation, which peaked at 20.52 per cent, year-on-year, in August.
Explaining the rationale for the rate hike, Emefiele, who read the committee’s communiqué, said the MPC was concerned that within a four-month period, inflation had accelerated aggressively by 280 basis points, from 17.7 per cent in May to 20.5 per cent. He said the decision to raise interest rate was unanimously agreed by members of the committee in order to narrow the negative real interest rate gap and hold back inflation.
Emefiele also announced that the CBN had injected over N9 trillion into the economy, in addition to offering a two-year moratorium for 10-year long-term loan facilities. He said the MPC believed that the interventions had significantly helped to engender growth.
However, in the light of the persistent pressures of inflation, the committee encouraged the CBN to maintain a close watch on the inflationary implications of the interventions.
Nevertheless, the apex bank boss said the committee was of the view that given the primacy of its price and monetary stability mandate, it was expedient that it focused on tackling inflation at this time.
Emefiele said a loosen or hold option was off the table during the meeting, pointing out that loosening would further widen the negative real interest rate gap, and worsen the financial market conditions, as savings mobilisation and investment inflows would decline further.
He said the committee was also of the view that with the aggressive policy normalisation in advanced economies, loosening would result in a sharp depreciation of the exchange rate, leading to a further hike in capital outflows.
However, Emefiele said holding the MPR at 14 per cent could mean a continuous deterioration in real earnings of fixed-income earners and the livelihood of low- and medium-income households.
Hence, the MPC noted that a tight policy stance would help consolidate the impact of the last two policy rate hikes, which was already reflected in the slowing growth rate of money supply in the economy.
Emefiele said the committee also felt that an aggressive rate hike could slow capital outflows and likely attract capital inflows and appreciate the naira. He insisted that as long as inflation kept its upward projection, the MPC could not give “assurance to anybody that we would not continue to raise rates.”
He said, “We’ve seen that rates have moved very aggressively recently and that is the reason we are following it up in May, July and now September meetings, very aggressively for us to see to what can be done to rein in inflation.”
Commenting on the upward adjustment in CRR, the CBN governor explained that the move was expected to mop up cash from banks’ vaults to counter speculative attacks on the naira. He said banks must adjust to the CRR rate within 48 hours or risk preclusion from the foreign exchange market, including the official Investors and Exporters (I&E) Window.
He said, “We have increased the CRR and we expect that this decision at this meeting will be seen to be potent and must achieve the effect that the MPC thinks it should achieve.
“We expect that all the banks in Nigeria must fund their account by Thursday – within 48 hours – because we will debit them for CRR. We would take their CRR, the minimum of 32.5 per cent, which means we’re going to take liquidity out of their vault by Thursday.”
Emefiele warned, “If any bank fails to meet up to this expectation, the decision arrived at the MPC is that we may need to preclude those banks from the foreign exchange market on Friday and onwards until they meet this 32.5 per cent.”
He added, “This message is meant to underscore the fact that MPC says this decision, this very aggressive decision to rein in inflation, must yield results. We do not want to face Nigerians in the next few months and begin to take the blame for not being able to rein in inflation in spite of all the rates that we have raised.
“We have to decide to adopt a two-pronged approach; increase MPR, CRR because we must mop liquidity effectively out of the vaults of the banks.”
On the timeline for a possible deceleration in inflation, Emefiele said, “Our view is that the lag period should be between two to three months. This is September and as we begin to get into November and December, we should begin to see deceleration and we are going to do everything possible to achieve this because we believe that with the liquidity out it would constrain using the money for speculative purposes.
“We are not going to sit down and allow people to go into their bank accounts to speculate against the currency, we will not allow it. That is the reason we would take money out of the vaults of the banks so that the speculative use of naira can completely be tamed.”
The CBN governor said the bank was determined to further intervene in the aviation sector to settle outstanding ticket sales following the recent release of $265 million to address the foreign exchange challenges in the sector.
He contended that though the Bilateral Air Service Agreement (BASA) stipulated that airlines’ proceeds must be repatriated, “It does not say that you must repatriate your dollars through the central bank.”
Emefiele added, “There is no law that makes it compulsory that you buy dollars from the central bank. When you put your own in your account, it means that you tell your bank to buy dollars and your bank will go to the legitimate or approved sources, which in this case is the I&E window, to buy dollars to pay for the ticket sales. If they don’t find, they can resort to the CBN, but it does not mean CBN is under compulsion.”
Emefiele also appealed to foreign airlines to honour BASA by allowing their Nigerian counterparts equal landing opportunities in their respective countries. He said a situation whereby a foreign airline had 21 landing schedules in Nigeria against only about seven for Nigerian operators in other countries was unfair.
He said, “We would like to appeal to the countries where the foreign airlines are domiciled or where their flights originate that they should, please, give Nigerian airlines also a chance to land their aircraft in their countries. Also in line with the Bilateral Air Services Agreement.
“You cannot be having 21 landing slots in a week from your country into Nigeria and, yet, you have not given a Nigerian airline that wants to land his aircraft in your country even up to seven landings. To us Nigerians, that is unacceptable. And Nigeria should stand and criticise this, that it is not acceptable.”
Emefiele, however, said the aviation sector had always enjoyed priority in forex allocation.
On the e-Naira project, which would clock one-year next month, Emefiele described the success as tremendously, adding that the digital currency has recorded about one million downloads.
He stressed that 905,588 customers had downloaded their app while 282,600 accounts were currently active.
The CBN governor said so far accounts of transactions exceeded N1.49 million worth over N3.484 billion, including 78,115 consumers to bank worth about N1 billion, bank to customer of 90,760 transactions worth N945 million; Consumer-to-consumer transactions worth of about 35,800 worth about N480 million and consumer-to-merchant which was about 171,000 transactions worth over N387million.
On the global scene, the MPC in its communiqué expressed concern over the heightened risk of spill-over associated with the broadly weakening global recovery. It added that these had been further exacerbated by uncertainties emanating from lingering supply chain bottlenecks, due to the Russia-Ukraine war and continued COVID-19 lockdown in China.
Consequently, it noted that global trade maintained a steady decline while inflation remained high, despite aggressive rate hikes by several central banks.
The communiqué stated that the risk of yet another global recession would be extremely damaging for fragile economies still confronted with the lag impact of the 2020 recession, especially for emerging market and developing economies currently confronted with huge capital flow reversals and tightening global financial conditions.
Emefiele said the broad outlook of the global and domestic economies in the medium-term remained clouded by uncertainties associated with lingering headwinds from the Russia-Ukraine war and the residual impact of the COVID-19 pandemic among others.
On the domestic front, the MPC noted that available data on key macroeconomic variables indicate that output growth will continue for the rest of 2022, however, at a much-subdued pace.
The CBN governor added that some of these domestic shocks included the high level of insecurity currently disrupting the free flow of economic activities; heightened sovereign risk as the 2023 general election approached; continued upward pressure on inflation, driven by exchange rate pressures, among other domestic factors.
In addition, domestic price was expected to maintain the current upward trend in light of the build-up of increased spending and demand for money, as the 2023 general elections approach.
Accordingly, the CBN governor forecasted that the Nigerian economy would grow in 2022 by 3.52 per cent, compared to the federal government’s projection of 4.20 per cent and 3.40 per cent by the international Monetary Fund (IMF).
Emefiele noted that the meeting focused on the aggressive acceleration of inflation globally and how this had begun to retard growth in both advanced and emerging market economies.
He said, “Members noted that though the global economy was progressively weakening due to the various headwinds confronting the recovery, in Nigeria, output growth had been sustained as a result of the combination of development finance interventions by the bank and fiscal stimulus by the federal government.”
The MPC noted the moderate downturn in the equities market, attributing it to a continued outflow of portfolio capital as investors re-assign their portfolios to more attractive US dollar-denominated fixed-income securities. The committee, however, called on the federal government to continue to improve the ease of doing business in Nigeria to retain the current patronage of foreign investors through sustained investor confidence in the Nigerian economy.
The MPC applauded the CBN for its continued stringent regulatory measures over the banking system, noting the progressive decline in the Non-Performing Loans (NPLs) ratio of the banking system despite the heightened macroeconomic uncertainties.
The MPC was concerned that within a four-month period, inflation had accelerated aggressively by 280 basis points from 17.71 per cent in May 2022 to 20.52 per cent in August 2022. The committee was, thus, of the view that given the primacy of its price and monetary stability mandate, it was expedient that significant focus be given to taming inflation.
