CBN Maintains Monetary Tightening Regime, Raises MPR Further to 27.25%

•Hikes banks’ CRR to 50% from 45%, merchant banks rate to 16% from 14% 

•NACCIMA, CPPE say stifling financial conditions to address liquidity issues detrimental to investment, economic growth

James Emejo in Abuja, Nume Ekeghe and Dike Onwuamaeze in Lagos

Unconvinced by the relative decline in inflation in July and August, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), yesterday resolved to raise the Monetary Policy Rate (MPR), the benchmark interest rate by 50 basis points to 27.25 percent from 26.75 percent in response to the continued inflationary conditions in the economy.

The apex bank retained the asymmetric corridor around the MPR at +500/-100 basis points, and also adjusted other monetary policy tools, increasing the Cash Reserve Ratio (CRR) of deposit money banks (DMBs) by 500 basis points to 50 percent from 45 percent and that of Merchant Banks (MBs) by 200 basis points to 16 percent from 14 percent. The MPC retained the Liquidity Ratio (LR) at 30 per cent.

This was the fifth consecutive hike in interest rate, having been raised by 8.5 percent under the current leadership of the apex bank.

The outcome of the MPC meeting beat analysts’ expectations that the committee would at least hold policy rates at current levels in response to the economic hardship faced by Nigerians.

However, addressing journalists at the end of the two-day meeting of the MPC in Abuja, CBN Governor, Mr. Olayemi Cardoso, said the decision to further raise MPR was unanimous among members of the committee in the face of unrelenting increases in prices of goods and commodities.

He said even though the latest figures showed that the central bank was heading in the right direction, the economy was currently not out of the woods yet, adding that the bank can’t afford to take chances by relaxing its policy stance.

He said to attract investments into the economy, efforts must be sustained to achieve a positive real interest rate to enhance the economy’s competitiveness for international capital, thereby improving the exchange rate.

He said the CBN would tighten monetary policy until things are put under control.

Cardoso, who read the committee’s communique stressed that it would be difficult to address poverty amid a high inflationary environment.

The MPC, however, observed the moderation in headline inflation year-on-year in July and August 2024, and also acknowledged the relative stability and convergence in the exchange rate across the various market segments, resulting from CBN’s tight monetary policy stance.

This, the committee believed was expected to improve confidence which would enable economic agents to plan in the medium to long term.

The CBN governor said the committee was unanimous in recognising that a lot more s required to actualise the bank’s price stability mandate.

He said even though headline inflation trended downwards due to a moderation in food inflation, core inflation remained elevated, driven primarily by rising energy prices.

He said the uptrend posed severe concerns to members, as it indicated the persistence of inflationary pressures.

Nonetheless, the committee reiterated the need to work in close collaboration with the fiscal authority to address the current upward pressure on energy prices.

The MPC noted the continued growth in money supply, recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.

Members also expressed concerns about the growing level of fiscal deficit but acknowledged the commitment of the fiscal authority not to resort to monetary financing through Ways and Means.

Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impact on the exchange rate, and resolved to increase monitoring of future releases to address its effects on price developments.

On food inflation, it pointed out that the upside risks remained recent flooding, hike in energy prices, scarcity of PMS, and most importantly, insecurity in farming communities.

Cardoso said considering the weight of food in the CPI basket, the MPC recognised efforts of the federal government in addressing insecurity in farming communities and stressed the need to remain steadfast.

The committee also applauded the ongoing effort of the federal government to bridge the food supply deficit through the duty-free import window for food commodities.

The committee also expressed optimism that the lifting of refined petroleum products from Dangote refinery would moderate transportation costs and significantly support the easing of food price pressures in the short to medium term.

This, he said, was also expected to moderate foreign exchange demand for the importation of refined petroleum products, with a positive spillover on external reserve and improvement in the overall balance of payment position.

The CBN governor further disclosed that the committee assessed the performance of key financial soundness indicators and noted with satisfaction that despite familiar headwinds, the banking industry remains safe, sound, and stable.

The committee, however, emphasised the need to sustain supervisory oversight of the industry to strengthen its continued support of the economy.

He said, “Following these considerations, members deliberated on the optimal policy option to sustain the downward trend in price development, contain emerging risks to inflation, stabilise the exchange rate and safeguard the banking system while also shielding the recovery of output growth.

In addition, members noted that the real policy rate remained negative even after the recent moderation in headline inflation.

He said, “Following a review of the upside risks to price development and the downside risks to the recovery of output growth, the committee opted to tighten policy further, to safeguard the gains already accrued in moderating inflationary pressure.”

Asked about the impact and achievements of the central bank under his watch within the last one-year when he assumed office, the CBN governor, painted the sordid state of the economy when he took control, adding that recent policy interventions had repositioned the economy.

He said, “Exchange rates is a lot more flexible and people are more able to transact their businesses through willing buyer, willing seller as opposed to a situation where multiple exchange rates discourages or does not enable that to happen. So, that has helped in no small way.

“And, of course, the moderation, the multiple hike in exchange rates. The multiple hikes in interest rates have also helped to moderate the inflation that I spoke about earlier. Don’t forget that here was a situation where the exchange rate was running at an incredible pace.

“And people had lost confidence or were beginning to lose confidence in the currency. We believe that these multiple hikes have helped people to now begin to take a different look at their currency.”

Cardoso said, “And there’s a greater incentive to hold Naira as opposed to a situation that we had before where this was not the case. Of course, we’ve ensured that the market operates more flexibly. Because you see, in all this, the encouragement for people to transact in our market has got to be when the confidence has been built up.

“And we believe that that’s what we have been able to do through clearing the backlog of $7 billion that I mentioned to you earlier. And being a lot more transparent in operations which, by the way, includes what we are doing here.

“The fact that we are having this discussion, the fact that we are opening up the various things that we are doing, gives confidence that there’s greater transparency in the way and manner in which we are carrying out our business.”

Cardoso admitted that the bank’s tightening policies were tough, pointing out that the bank had no choice but to deploy these tools to ensure that it reigns in the excess liquidity that has been in the system, including high inflation that resulted from excess liquidity.

He said there was need to encourage portfolio investors, those who are outside and have taken flight, to come back into the economy.

Specifically, the CBN governor said under his watch, the apex bank had done a great deal in restoring credibility to the central bank and regaining the trust in the institution, a development that had attracted positive ratings from global rating agencies.

He said, “We are not there yet. It is a continuum. But without the success of rebuilding back the trust, all the other things that we want to credit ourselves with having done or wanting to do will not happen.

“And that is part of the reason I mentioned earlier on. And I was asked this at a particular forum I went to. Why did you prioritise paying back the backlog? Why did you do that? Why couldn’t you have sort of found a way to stretch it out over a period of time? And the answer to that, quite frankly, is that it’s part of the building of trust process.

“People have to trust you. They have to know that irrespective of what has happened, there’s somebody in the saddle who is looking at things in a very dispassionate manner and will come to conclusion that are in the best interest of all.

“That is very important. And that is another thing that I will talk about, which is in the process of doing all these things we’ve done. We decided it was important to refocus the mandate of the central bank to orthodoxy.

“We are fully engaged in getting ourselves out of unorthodox means of running the central bank. And I’ve spoken about this on several occasions. It is all part of focusing on a core mandate which essentially will moderate prices as we have begun to see the results and will eventually result in price discovery on the foreign exchange side.

“These are all linked together. You cannot take one without the other. And I must say that a year later, I’m very pleased to note that the rating agencies, for example, have given us a more positive rating than when we came in.”

He said, “And that in itself, as far as I can see, speaks volumes. Because, again, the rating agencies are not one given to emotion. They come in, they look at your books, they look at your numbers, they ask you the right questions, they see your projections, and based on that, they rate you accordingly.

“And we so far have been positively rated. So, I can sit down here talking for the next hour about the great things that I believe I have done. I believe, again, we are not there yet.

And I accept the fact that many outside are finding things very difficult. They are finding it very difficult.

“But I want to say that the things we are doing are set to put the economy of this country in a trajectory where we shouldn’t go back and see some of the inefficiencies we’ve seen in our system over the recent past.

“So, these I believe are short-term pains, and eventually we will get out of the situation we are in now. We have also been very careful concerning transparency around our operations. And for those of you who don’t know, when we did the last foreign exchange intervention with rDAS, that was one of the reasons we used that, because we felt it was important at that time to send a very positive, transparent signal out for everybody to know exactly what is going on and how foreign exchange resources were being expended.”

Meanwhile, reacting to the MPC decision, the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) expressed concerns over the decision to increase the MPR to 27.25 percent.

In a statement, the National President of NACCIMA, Dele Kelvin Oye, stated that the decision would heap more burden on businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.

The statement read: “As President of NACCIMA, I express concern over the CBN’s recent monetary policy rate hike to 27.25 percent. This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.

“We urge the CBN to engage stakeholders for a collaborative approach, considering alternatives like targeted sector support, deficit reduction, and promoting local production.

“A reassessment of strategies is essential to ensure effective economic management and sustainable growth in Nigeria. Dialogue and innovative solutions are crucial for repositioning our economy.”

He further noted, “The increase is 50bps. It is not a material change. The narrative is the trend upwards.

“This is a confirmation that the previous high interest rate has not worked.”

For its part, the Centre for Promotion of Private Enterprise (CPPE) described the MPC’s decisions as a very difficult monetary condition for most businesses to bear.

The Chief Executive Officer of CPPE, Dr. Muda Yusuf, in a statement titled, “September 2024 MPC Decisions Detrimental to Investment and Economic Growth,” noted that it was quite troubling that at a time when manufacturers, entrepreneurs and other investors in the economy were craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy.

According to him, “stifling the financial conditions to address liquidity issues is detrimental to investment and growth of the economy.”

Yusuf said the latest policy choice of the apex bank was at variance with the mood of most economic players and the desire to promote economic recovery and growth.

He said: “What manufacturers and other investors need at this time is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation.

“MPR at 27.25 per cent; CRR at 50 per cent and asymmetric corridor at +500 and -100 are very difficult monetary condition to bear for most businesses, given the prevailing macroeconomic and structural conditions.”

Yusuf pointed out that the second quarter 2024 GDP numbers showed clearly that the economy was still in a floundering mode as many critical sectors of the economy such as manufacturing and other subsectors of the industrial sector such as cement, food and beverage, chemicals and pharmaceuticals, trade, ICT and real estate slowed.   

He added that the road transport, motor assembly, publishing and motion pictures sectors contracted during the quarter while the aviation, oil refining, textile, livestock and quarry and minerals sectors were still in recession.

Therefore, “tightening financial conditions in the circumstances does not seem appropriate. 

“The private sector should not be made to pay the price of liquidity growth, which they were not responsible for.  Issues of excess liquidity should be addressed within a causative context.

“The injection of liquidity into the system are largely public sector driven, as rightly noted by the CBN’s governor.  Therefore, the focus of resolving it should be within that context.”

He stated that “the implication of the latest MPC decision for investors are quite concerning as cost of funds would be further exacerbated, possibly well above 35 per cent or more.

“It is made worse by the increase in CRR to 50 per cent and retention of asymmetric corridor of +500 and -100.

“We believe that the policy decisions of the CBN are most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country.

“The operating and production costs of businesses would be further exacerbated by the latest monetary policy tightening. 

‘The increase in CRR to 50 per cent would constrain financial intermediation with negative consequences for the banking system and the economy.”