Why we raised interest rate to 27.5% – CBN

CBN Hikes Monetary Policy Rate to 27.5% Amid Persistent Inflationary Pressures

The Central Bank of Nigeria (CBN) has raised the Monetary Policy Rate (MPR) from its previous level to 27.5%, citing persistent inflationary pressures, particularly the rise in core inflation driven by escalating energy prices. The decision was taken by the Monetary Policy Committee (MPC) during its meeting on September 23-24, 2024.

The MPC, comprising 12 members, with 11 present at the meeting, agreed to further tighten monetary policy to curb inflationary pressures. The committee also decided to retain the asymmetric corridor around the MPR at +500/-100 basis points, raise the Cash Reserve Ratio for Deposit Money Banks and Merchant Banks, and maintain the liquidity ratio at its current level of 30%.

The CBN attributed the hike in MPR to persistent inflationary pressures, particularly in the core segment, which remains a concern despite a slight moderation in headline inflation in July and August 2024. Core inflation continues to rise due to increasing energy prices, which is a major driver of inflation.

The committee commended the relative stability of the exchange rate across market segments, attributing it to the CBN’s tight monetary policy. However, it noted that excess liquidity in the system is contributing to exchange rate volatility and inflationary pressures.

The MPC emphasized the need for increased monitoring of the banking system, particularly in relation to the disbursement of Federation Account Allocation Committee (FAAC) funds, which have a strong correlation with liquidity levels in the banking sector.

The committee identified several factors that pose upside risks to food inflation, including flooding, rising energy costs, PMS scarcity, and insecurity in farming communities. It praised the government’s efforts to address these security challenges and its move to allow duty-free imports of food commodities.

The CBN expressed optimism that the increased supply of refined petroleum from the Dangote refinery will ease transportation costs and reduce food prices in the near term.

In conclusion, the CBN reiterated its commitment to curbing inflation and stabilizing the exchange rate, emphasizing the importance of close collaboration with fiscal authorities to address current economic challenges.

The move is expected to impact businesses and individuals in various sectors, including agriculture, manufacturing, and trade. As the economy continues to grapple with inflationary pressures and exchange rate volatility, stakeholders will be closely monitoring the CBN’s future policy decisions.