CBN and Consistent Increase in MPR 

Arize Nwobu

The vision of the Central Bank of Nigeria (CBN) is to be the most efficient and effective of the world’s central banks in promoting and sustaining economic development. 

And the mission is to be proactive in providing suitable framework for the economic development of Nigeria through the effective, efficient and transparent implementation of monetary and exchange rate policy and management of the financial system. 

PwC had noted that Central banks need to not just adapt to changing conditions, but should also be proactive and anticipate the shifts ahead and how they are going to change the playing field for monetary policy and financial stability. 

CBN under the Governor, Yemi Cardoso is connected with the economy and is on top of the challenges of the economy. 

Cardoso and his team have demonstrated cognitive creativity and high degree of knowledge towards finding ingenious solutions to the challenges of the economy.

The economy had dipped during the immediate past administration and before the present CBN management assumed office. But the challenges became aggravated by the removal of fuel subsidy and the floating of the exchange rate, both of which combined with other factors including devaluation of the naira, insecurity and reduction in productivity to escalate inflation. 

It is important to note that both the removal of fuel subsidy and floating the exchange rate are not bad per se, instead they were necessary and desirous.

Hitherto, payment of fuel subsidy had been a source of huge leakage in the economy and it had denied the economy huge quantum of funds which,  otherwise, would have been channeled into productive ventures.

It is expected that the removal of fuel subsidy will help to plug the leakages and rechannel funds back into essential economic and social infrastructures that will help to catalyze economic growth. 

The advantages of floating the exchange rate is that it will lead to the increase in foreign reserves because CBN would not have to use the reserves to intervene in the forex market to stabilize the exchange rate and which gives room for the government to possibly, use it for essential capital projects. 

Presently inflation is the big challenge in the economy and CBN is working dedicatedly and using monetary policy tools to fight it towards setting the economy on a strong pedestal. 

Inflation determines how a central bank regulate its money supply and managing inflation demands both technical and tactical strategies. 

Raising the Monetary Policy Rate( MPR) is the immediate and ready made mechanism which central banks use to fight inflation and that is what CBN is doing. 

CBN has consistently increased the MPR since February 2024 and also adjusted other monetary policy tools including the Liquidity Ratio( LR) and Cash Reserve Ratio( CRR) of banks, all of which are components of the monetary transmission mechanism which central banks use to influence aggregate demand in the economy. 

In February 2024, the Monetary Policy Committee( MPC) of CBN raised the MPR from 18.75 per cent to 22.75 per cent,  which was phenomenal and unprecedented in the record of the MPC. Subsequently in March 2024, the MPR was raised from 22.75 per cent to 24.75 per cent and further to 26.25 per cent. 

Recently, the MPR was further raised from 27. 25 per cent to 27.50 per cent, which is a 25 basis point increase. 

The CEO, Financial Derivatives Company, Bismark Rewane noted that the increase was a slap on inflation and that the market expected a 50 basis point increase.  Cardoso had noted that the MPC was being scientific and often looked at the face of data before they took decisions and assured that CBN would moderate the spiking inflation. 

Inflation is currently at 33.9 per cent and is driven by transportation costs, exchange rate volatility, supply constraints, fiscal policy and money supply. The quantum of money in circulation has been on the increase and which is not healthy for the economy. 

Money supply rose from N1.4 trillion to N3.2 trillion in seven years. In January 2024, it grew to N3.28 trillion and to N3.9 trillion in March. 

And by October 2024, total amount of currency in circulation had increased to N4.1 trillion with 93 per cent of the amount said to be outside the banking system. 

The development is not agreeable to CBN, thus the consistent increase in the MPR by to regulate money supply towards helping to achieve the macroeconomic objectives of government. 

But for good effect, government also need to demonstrate fiscal responsibility, avoid a runaway debt and maintain an effective money supply to avoid further inducing inflation. 

Experts have noted that governments induce inflation when they incur debts, print money and increase the money supply at a much greater rate than the growth of the GDP.

CBN’s consistent increase in MPR to fight inflation is similar to what Paul Volcker, a former US Fed Chairman( 1979-1987) did in the fight against inflation.

Volcker consistently increased the Fed Fund rate until the economy went into a recession, but he continued to increase the Fed Fund rate until inflation rate tumbled down and he became a hero and nicknamed as “the man who quashed inflation”.

CBN’s consistent increase in the MPR may also recreate the Volcker effect, though some analysts have noted that increase in MPR is more effective in a Demand-pull inflation, but that Nigeria has a Cost-push inflation.

An analyst and formerly with Leadway Pension, Mr Uzor Okafor noted that while the Volcker strategy may have been more effective in the US context, Nigeria’s unique economic and institutional challenges required a more nuanced and context specific approach to managing inflation. 

It is anticipated that CBN’s policy options will create the desired impact over time and as Bismark Rewane noted, there is always a lag when decisions are made and when the impact. are felt.

The new CBN management assumed office a year ago and it is anticipated that the impact of their policies will begin to manifest from the first quarter Q1 2025.

And if they are able to rein in inflation in collaboration with the fiscal authority, the economy will be set on the right pedestal and 

 ready for growth. 

As they say, no pain, no gain. 

The two policies that aggravated inflation are the removal of fuel subsidy and floating of the exchange rate, but like I noted earlier, they are not bad per se, and are indeed necessary for the growth of the economy. 

If properly managed, the three policies of fuel subsidy removal,  floating of the exchange rate and CBN’s consistent increase in the MPR to fight inflation may be the game changers in the economy. In the long run President Tinubu and CBN Governor, Yemi Cardoso, may turn out to be economic heroes. President Tinubu is noted as a slow starter but also a winner. 

As Governor, Lagos State, Yemi Cardoso was also in his team and his government  started slowly but later gained momentum and set Lagos State on a futuristic path. 

It is also anticipated that President Tinubu and CBN Governor, Yemi Cardoso and his team will synergize to set the economy on a stronger pedestal for growth and prosperity. 

Nwobu, a Chartered Stockbroker and Policy Analyst wrote via arizenwobu@yahoo.com