Rising Inflation, Depreciating Naira Compel CBN To Raise Interest Rate To 15.5%, CRR, 32%



With high inflationary pressures that have brought down the value of the local currency and increasing impoverishment,  because of  upward trends of the cost of goods and services, particularly, good items and transport, the Central Bank of Nigeria (CBN) believes interest rate at 14 percent is useless and therefore has raised the Monetary Policy Rate (MPR), which measures interest rate, to 15.5 percent to tame the monster.

But some analysts say the development signposts tough times ahead for bank debtors and businesses as lending rates hovering between 20 and 25 percent are expected to rise depending on the level of risks.

Banks are also expected to review rates on new businesses as well as old ones, putting debtors on tough business lanes.

Also, with little cash likely at the disposal of the banks following hike in the percentage expected to be kept with CBN as rederves, they would not have option other than to visit it on customers and businesses by way of higher lending rates and other charges to survive.

Already, the banks have been subjecting customers to various levies such as payment for reference letters and other charges, thereby compounding the challenges weighing down customers.

The CBN governor, Godwin Emefiele at the 287th Monetary Policy Meeting said “its decision was a move to save the naira and curb inflation.“

But the pressures and the attendant devastating effects have failed to abate despite the hike in rates, with millions of dollars expending by CBN to save the naira through weekly interventions.

But the resultant effect is the widening gap between the official exchange rate and black market rate, creating ‘unhindered harvest’ for speculators.

Currently, Nigeria’s inflation is at 20.52 percent according to the National Bureau of Statistics Consumer Price Index for in August 2022.

Foreign exchange scarcity is a major factor driving prices and has led to devaluation of naira which is currently trading around N720 at the black market and N431.8 at the CBN rates.

During the meeting, the apex bank governor said high energy cost and electricity tariff pushed the inflation upwards.

According to him, the increase in US rates has also pressured the naira and making investors exit the Nigerian market.

Consequently, Emefiele said broad outlook remains clouded due to headwinds of the Ukraine war and residual impacts of Covid-19.

He said the Nigerian economy will grow but at a “much subdued rate” due to the increased demand for money driven by the 2023 general election.

According to him, the rise in inflation over the past four months has been worrisome.

The CBN governor said loosening inflation would worsen Nigeria’s economic condition as well as naira depreciation.

He said a tight policy stand would help appreciate the naira.

The Governor said, “The committee voted unanimously to raise the MPR…The MPC voted to raise the MPR to 15.5, retain the asymmetric corridor at +100 -700 basis points around the MPR. Increase the Cash Reserve Ratio (CRR) to a minimum of 32.5% and retain liquidity ratio at 30%.”

Giving an explainer earlier, the apex bank’s governor said, “Members deliberated the impact of the widening margin between the current policy rate of 14 percent and the inflation rate of 20.52 percent.

“At this meeting, the option of reducing the policy rate was not considered as this would be gravely detrimental to reigning in inflation. The committee thus agreed unanimously to raise the policy rate to narrow the interest rate gap and reign in inflation. The committee thus voted unanimously to raise the MPR.

“10 members voted to raise the MPR by 150 basis points, one (voted to raise it) by 100 basis points and one by 50 basis points. 10 members voted to increase CRR (Cash Reserve Ratio) by 500 basis points, while two members voted to increase it by 750 basis points.”

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