MPC: Interest rate hike‘ll attract forex inflows, ease inflation pressure-Experts

By Motolani Oseni

As widely projected, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), on Tuesday hiked the benchmark interest rate to 15.5 per cent, a development that some finance analysts described as a way to lure foreign inflows into the country and ease the inflation pressure.

The MPC of the Apex bank after its two-day meeting in Abuja yesterday raised its benchmark interest rate, known as Monetary Policy Rate (MPR) by 150 basis points to 15.5 per cent after

The Committee also raised the Cash Reserve Ratio (CRR) to 32.5 per cent from 27.5 per cent. The CRR, which is the share of a bank’s total customer deposit that must be kept with the central bank in the form of liquid cash.

This was in consideration of the persistent rise in inflation rate and fragile growth. Nigeria’s headline inflation accelerated to the highest level in 17 years at 20.52 percent in August 2022, from 19.64 percent in the previous month.

The CBN had in the last few months increased the MPR by a combined 250 basis points to rein in inflation. In its meeting in May 2022, the CBN raised its benchmark interest rate by 150 basis points to 13 percent, the first time in six years. It raised it further in July by 100 basis points to 14 percent.

After the meeting, MPC members unanimously voted to retain other parameters. Consequently, the CBN retained the Asymmetric Corridor of +100/-700 basis points around the MPR: and the Liquidity Ratio at 30 percent.

At the meeting, the monetary policy committee evaluated the developments in the global economy and domestic environment so far in 2022, particularly the rising energy prices and supply chain disruption triggered by the ongoing war between Russia and Ukraine.

The committee also reviewed the global and domestic financial environment as well as the outlook and possible risks for the remaining months in 2022. Twelve members of the committee were in attendance and they decided to raise the monetary policy rate for the third consecutive time in the year.

Godwin Emefiele, governor of the CBN, who announced the decision after the meeting said: “The MPC noted with concern the continued aggressive movement in inflation, even after the rate hike at its meeting in May and July 2022, and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.”

Although, the latest GDP report showed that Nigeria’s economy grew by 3.54 per cent in the second quarter of 2022, however, the rising inflation (which accelerated to 20.52% in August 2022) remains a major threat to economic output.

PAC Capital said hiking the policy rate is expected to ease inflation pressure and narrow the negative real interest rate thereby attracting forex inflow to support the ailing naira.

“While we expect the decision of the CBN to raise the key rate and reduce the systemic liquidity to be potent in the medium term; we believe that the country’s fiscal authority must continue to pursue growth-oriented policies to boost local productivity”, analysts said.

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On the financial instruments, analysts said they expect the yields on bonds, treasury bills and commercial papers to increase in the primary and secondary markets. Hence, investors are expected to rebalance their portfolios by migrating from the stock market to the fixed income market.

Analysts, therefore, believed that hike in MPR and the CRR would ease the pressure on Naira and the persistent rise in inflation.

The naira, which stood at N722 per dollar in the more-accessible parallel market, slumped to N436 per dollar in the official market, due to rising demand for dollars for Business Travel Allowance, Personal Travel Allowance, and school fees by the end-users amid scarcity of the greenback.

The naira has now weakened by 21.74 per cent against the dollar in the parallel market since the beginning of the year, compared with a 3.9 per cent decline in the official market.