The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the policy rate by up to 150 basis points to 13 percent following a meeting on Tuesday chaired by the bank’s governor, Godwin Emefiele, and maintained all other parameters, including the asymmetric corridor of +100/-700 basis points around the MPR, the CRR at 27.5 percent, and the Liquidity Ratio at 30 percent.
The decision aligns the CBN with other central banks across the world in their initiatives to restrict money demand growth and the upward trend of domestic prices.
Governor Emefiele stated that the decision was made because of profound worries about the sustained rise in inflationary pressure, which the committee believes may be detrimental to growth and impede the economy’s full recovery.
He also stated that when deciding on a rate hike, the committee identified several supply-side factors that may be contributing to inflationary pressure, and that emerging evidence shows that money demand pressure is on the rise and is unlikely to abate until the 2023 general elections are completed.
“After carefully reviewing the developments of the last two months and the outlook for both the domestic and global economies, as well as the benefits and downsides of each policy option, the Committee decided to raise the Monetary Policy Rate (MPR) to rein in the current rise in inflation as members were of the view that the continued uptrend would adversely affect growth,” Emefiele said while reading out the policy communiqué from the meeting in Abuja on Tuesday.
“In the current situation, the Committee was of the opinion that it was faced with either holding all policy parameters constant to allow previous policy measures to continue to support growth or tightening policy to curb money demand growth and upward movement in domestic prices.” A loosening option would almost certainly result in additional liquidity, higher inflationary pressure, and further pressure on the exchange rate.
“The decision to hold, in the opinion of members, will not only continue to support growth, albeit moderately, but will also allow money demand to grow at the current rate, leading to an increase in inflationary pressure.” While the committee’s primary concern is growth, the continued rise in domestic price levels is plainly a downside risk to growth that must be addressed immediately.
“While raising rates in the face of fragile growth may appear contradictory, this is the dilemma that most central banks around the world are currently facing.” On balance, however, it is reasonably evident and persuasive that addressing inflation is more pressing in the hierarchy of economic priorities. In this context, the MPC recommended the bank redouble its efforts to support the economy’s priority growth-enhancing sectors while encouraging the Federal government to do more to ensure a safe and secure environment for economic agents to improve activity and growth,” he said.