CBN raises key interest rate to highest level in move against inflation
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The Central Bank of Nigeria on Tuesday raised its benchmark lending rate by 1.5 per cent points to 15.50 per cent, its highest level since 2006 when the rate was introduced, in an aggressive push to control inflation and ease pressure on the naira.
Inflation rose in August to 20.52 per cent from 19.64 per cent in the previous month, the highest in 17 years. Naira weakened on Monday to N720 to one U.S. dollar at the parallel market, leaving the gap between the black market and the official market at more than 65 per cent, the highest in six years.
The central bank hopes raising rates will reduce money supply in the economy and rein in inflation, but analysts say the move also faces the risk of slowing economic growth. A higher interest rate will raise the cost of borrowing for businesses, and may make goods and services even more expensive.
“We have raised rates by 250 basis points in the last two meetings but inflation has surged further. This means that our own inflation is not tightly linked with interest rates and may recede in its own time,” Tope Fasua, an economist, was quoted by the News Agency of Nigeria as saying before the increase on Tuesday.
Mr Fasua said raising rates further would only punish local industries which borrow locally and are struggling to achieve previous levels of production post Covid-19.
“Their margins are always so high, so the committee and the CBN must be careful about raising rates ad infinitum,” he said.
Tuesday’s decision by the CBN’s Monetary Policy Committee (MPC) was the third time in a row the bank would raise its interest rate. The bank has this year alone raised the benchmark rate by four percentage points cumulatively. CBN Governor Godwin Emefiele said the decision was unanimously arrived at by members of the MPC.
“The MPC noted that a tight policy stance would help consolidate the impact of the last two policy rate hikes, which is already reflected in the slowing growth rate of money supply,” Mr Emefiele said while announcing the hike in Abuja.
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“It also felt that an aggressive rate hike would slow capital outflows and likely attract capital inflows and appreciate the naira currency.” He did not rule out further hikes.
The big jump on Tuesday surprised analysts, some of whom had predicted a smaller raise of 0.5 percentage points.
Umhe Uwaleke, a professor of capital market at Nasarawa State University, said he would have advised the CBN to hold the previous rate of 14 per cent.
“This is because the major drivers of inflation in Nigeria today are cost-push related rather than demand-pull,” he was quoted by NAN as saying. “Furthermore, policy tightening may not really tame inflationary pressures that are stemming more from high cost of energy and negative impact of insecurity on food output. Any hike in rate at this time will hurt output growth through higher cost of lending to SMEs.”
In a further contractionary measure, the CBN increased the reserve requirements for banks to park excess liquidity by raising the Cash Reserve Ratio to 32.5 per cent from 27.5 per cent. Mr Emefiele said banks that fail to increase their reserves would be barred from the foreign exchange market from Friday.
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