CBN: Taming Inflation with MPR Tightening

Eromosele Abiodun Writes on the steps being taken by the Central Bank of Nigeria to tame inflation anchored on effective use of monetary policy

Recently, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the benchmark interest rate by 50 basis points in a bid to tackle rising inflation, marking the sixth consecutive rise. Following previous effort of the CBN, there was a dip in December 2022. However, inflation rate climbed to 22.04 per cent in March, which led to 10 of the MPC’s 12 members voting in favour of the rise. The Monetary Policy Committee of the central bank is responsible for the nation’s monetary policy. It is made up of 12 members who meet regularly to discuss economic developments and set monetary policies that will ensure price stability and economic growth.

Meanwhile, while analysts have warned that growth may be affected by continued rate rise, the committee said other macroeconomic variables were moving in the right direction.

However, despite the hike in inflation figures, the economy has posted growth for nine consecutive quarters, with output expected to continue rising into 2024. This shows that the MPR rate tightening over the past few months by MPC was the right decision.

What critics fail to understand is that the Central banks play a crucial role in economic development and stability, and their monetary policies help control inflation rate across the globe. Following global trends,, the Central Bank of Nigeria recently raised its benchmark interest rate by 50 basis points, with the goal of taming the nation’s inflation.

Taming Inflation

At its 290th meeting held in Abuja, the committee decided to raise the benchmark interest rate by 50 basis points, making it the sixth time in a row that the CBN has raised the Monetary Policy Rate. The MPC raised the MPR to 18 per cent, retaining the asymmetric corridor of +100/-700 basis points around the MPR, the Cash Reserve Ratio (CRR) at 32.5 per cent, and the Liquidity Ratio at 30 per cent. The committee voted by a majority of 10 members to raise the MPR by 50 basis points, with one member voting to raise the MPR by 25 basis points and one member voting to hold the MPR.

Analysts believe the decision to raise the MPR was made in an effort to curb the rising inflation rate in Nigeria. Although the inflation rate in the country has continued to rise aside from the marginal decline in inflation in December last year, the inflation rate rose to 22.04 per cent in March this year, and the rate of increase has been lower. Data showed that while inflation had been rising by around 0.3 per cent, late last year, the rate increase if computed on year on year (Y-oY) basis has actually tempered to 0.13 per cent.

Between October and November last year, Year on year inflation had risen by 0.32 per cent and 0.38 per cent respectively. However, it moderated to 0.09 and 0.13 per cent in February and March this year respectively.

IMF Applauds CBN Policy Stance

The CBN’s monetary policy regime has been applauded globally with some analysts saying the inflation rate in the country would have spiraled out of control if the CBN had not taken proactive measures.

For instance, at the recent International Monetary Fund (IMF)/World Bank Spring meetings held in Washington DC last month, the IMF advised the CBN to continue with its policy of tightening monetary policy to control inflation. The IMF retained Nigeria’s Gross Domestic Product (GDP) growth projection for 2023 at 3.2 per cent, as stated in its World Economic Outlook (WEO) titled, “A Rocky Recovery.”

Division Chief, Research Department, IMF, Daniel Leigh, emphasized the need for the CBN to maintain a tightening mood to bring inflation down to more target levels. The CBN has gradually increased its benchmark interest rate, the Monetary Policy Rate, since last year, having raised it six times. The IMF also predicted that inflation in Africa would gradually decline, although it would remain in double-digit

Inflation in Africa

Speaking on the projection for Africa’s economy during the media briefing, Chief Economist and Director Research Department, IMF, Pierre-Olivier Gourinchas, noted that inflation for the region was still high, even as he forecasted a gradual decline for the region.

Gourinchas added that the economy was being affected by external factors adding that the region was slated to have a slow growth in 2023.

 The IMF official added, “This region is suffering from a strong funding squeeze. We already discussed that some of the countries that are facing very innovative spreads and a lot of them are already in the region.

“A lot of the challenges come from external factors that vary from the surge in energy prices and food prices as a consequence of the Russian invasion of Ukraine and the tension in energy markets is affecting the region. So we have a slow in growth for the region overall to about 3.6 per cent in 2023 from 3.9 per cent last year.

“We also have a situation where inflation is elevated, it’s double-digit inflation and is expected to come down from 16 per cent, to about 12.3 per cent, but still double-digit inflation. And, of course, the very important challenge for the region is as a result of these elevated food prices, we have a large number of people who are in situations of food insecurity and we estimate about something like 430 million people in a situation with food insecurity.”

Growth Considerations

While the consistent tightening of monetary policies may hamper economic growth, the committee noted that while the continued rise in headline inflation remained a significant problem confronting the economy, other macroeconomic variables are moving in the right direction, despite observed headwinds. The committee’s stance has been proven right with the recent number released by the National Bureau of Statistics (NBS).

The NBS Data showed that Real Gross Domestic Product (GDP) grew by 3.10 per cent in 2022. In the fourth quarter of 2022, it grew by 3.52 per cent (year-on-year), compared with 3.98 per cent in the corresponding period of 2021 and

2.25 per cent in the preceding quarter. But market watchers are of different opinion on the impact of consistent tightening policy. While some analysts are concerned that the consistent tightening policy could hamper the growth of the economy, others believe the economic variables are heading in the right direction. This is as the Nigerian economy had maintained a positive growth trajectory for nine consecutive quarters, since exiting the recession in 2020.

 CBN, Analysts Explains

Recently, the CBN Governor, Godwin Emefiele, explained that the rise in inflation is attributed to the increase in the food component, high cost of transportation of food items, security challenges in major food-producing areas, and infrastructural problems.

He noted that other macroeconomic variables are moving in the right direction, despite observed headwinds.

For analysts at Cowry Assets Management, while the 50-basis point increase in policy rate intended to combat rising inflation could result in slower economic growth and a reduction in the overall money supply, aiming for sustainable economic growth and price stability.

However, they believe that rising inflation remains a major concern in most economies, including Nigeria, and is making it difficult to achieve price stability. This trade-off may lead the central bank to adopt a contractionary stance for an extended period. The analysts also emphasize the downside risks of inflationary pressures and how the central bank’s monetary policy tightening measures will depend on the inflation path.

As the MPC had slowed on its hawkish stance, reducing the rate of increase of benchmark interest rate from 100 basis points to 50 basis points, the easing in the rate of increase in inflation figures is expected to continue as the impact of the previous MPR hike begins to take full effect in the economy especially as elections which contributed to rising inflation is now over.