The current galloping global and local inflation has compelled the Monetary Policy Committee of the Central Bank of Nigeria (CBN) to raise the benchmark interest rate from 14 to 15.5 per cent.
The decision taken on Tuesday makes it the third time the CBN would be raising the Monetary Policy Rate, which is the same as the benchmark interest rate in five months.
In May, the MPC had raised the rate from 11.5 to 13 per cent, and further to 14 per cent in July, before increasing it to 15.5 per cent in a latest blow on cash-strapped Nigerian business, especially small and medium enterprises.
The CBN Governor, Godwin Emefiele announced the decision after the MPC meeting, saying that members were concerned with the continued aggressive movement in inflation, “even after the rate hike at its meeting in May and July 2022”. He also expressed an unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.
“We will keep increasing the interest rate to reduce the high effect of inflation,” Emefiele said, noting that “the tested monetary policy theory is that the easiest way to tame inflationary pressure is to raise rates.”
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Emefiele explained that the MPC was of the view that with the aggressive policy normalisation of the economies, losing the policy stance could hurt the economy.
He further said that the CBN would implement aggressive cash reserve requirement measures to mop up excess liquidity from commercial banks by Thursday. He therefore cautioned banks to fund their accounts immediately, warning that lenders which failed to fund their bank accounts would be denied access to the foreign exchange market.
Experts believe that the measure is meant to tame inflation and arrest the currency crisis.
The governor further stated that the CBN was not compelled by any law to provide dollars to airlines, but was determined to clear the foreign exchange backlog owed to airlines as long as their banks were fully funded, noting, however, that it was not the CBN’s responsibility to provide dollars to foreign airlines.
Deputy-President of the Lagos Chamber of Commerce, Mr Gabriel Idahosa, said the CBN had to increase the MPR in an effort to stem the rising inflation rate that had crossed the 20 per cent mark.
“The economy now threatens to slide into runaway inflation – which is uncontrollable in the short term. This sharp rise in MPR may help to slow down the inflation if it is supported by significant efforts to reduce the production costs of goods and services,” he noted.
“But in most instances, when people need money at all costs, they can get it at any interest. That is what we call “economic backlash.” Economic backlash is described as a situation whereby a policy which you put in place to be able to address a situation goes in the opposite direction.
