The CBN’s Monetary Policy Committee (MPC) raised its benchmark interest rate by 25 basis points to 18.75% from 18.50%, the highest rate since MPR was adopted in 2006. It however narrowed the asymmetric corridor to +100/-300 basis points from +100.-700 basis points around the policy rate. Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) are held steady at 32.5% and 30%, accordingly. This is the fourth consecutive rate hike so far this year and the eighth consecutive rate hike since April 2022.
The moderate increase by the authority is in response to inflation expectations, negative interest rate gap, improving investor confidence, and supporting investment flows into the country. However, the significant adjustment in the asymmetric corridor could restrict credit and cap liquidity with implications on local businesses. This is a contradiction to the new administration’s promise of a low-interest rate to lay the foundation for a robust credit economy.
Between January and June 2023, the headline inflation rate accelerated for the sixth consecutive month to 22.79% and is expected to rise further due to subsidy removal, exchange rate harmonization, and the anticipated impact of the palliative distribution in the near term. The option to continue to hike the policy rate came amid a slight downgrade of the country’s growth projection to 2.8% by the World Bank.
The CBN should moderate the key rate given the weak relationship between it and inflation, especially after manufacturers and other businesses are groaning under high operating costs, low growth, and more especially in the face of high unemployment. Furthermore, monetary policy alone appears insufficient to guarantee the desired results of low, stable, and predictable prices. We are of the view that structural rigidities around infrastructure and agriculture should be explored and tackled to rein in inflation.
DR CHINYERE ALMONA, FCA
LAGOS CHAMBER OF COMMERCE & INDUSTRY
27 JULY 2023