The Central Bank of Nigeria (CBN) led monetary policy committee on Tuesday raised Nigeria’s benchmark interest rate by 100 basis points from 16.5% to 17.5%.
Explaining the modalities for the increase, the committee said global risk amid the ongoing Russia-Ukraine war, rising Covid-19 cases in China, heightened inflation rate in developed economies, and Nigeria among others would impact local growth in 2023.
Despite the marginal slowdown in the inflation rate in the month of December, the committee was not convinced that a slight 13 basis points decline in headline inflation would be enough to rein in prices going forward.
The committee was also worried that a hold would invalidate its previous stance and signal weak confidence in its own policy because of a single decline. It said loosening the policy rate under a double-digit inflationary pressure would reverse the already established downward trend.
However, given that Nigeria’s inflation is cost-push inflation, a persistent increase in the price of scarcely available goods and services, increasing borrowing costs would further drag on economic productivity, retail sales, new job creation and consumer spending.
But an increase would ensure capital inflow into the economy as global investors would look to take advantage of the huge interest rate. This would help augment the nation’s dwindling foreign reserves.
“The Committee noted the marginal decline in the external reserves, as gross external reserves decreased by 0.95 percent at end-December 2022 to US$36.55 billion, from US$36.9 billion at end-November 2022,” the communique no 146 of the monetary policy committee meeting obtained by Investors King reads.
Suggesting that sustaining capital importation in a nation that depends on import products for most of its consumption is at the core of the decision.
Out of the twelve members that voted one member voted in support of an increase by 150 basis points, four voted for 50 basis points while the remaining seven members voted for a 100 basis points increase.
The twelve-member committee agreed to retain the asymmetric corridor of +100/-700 basis points around the MPR; Retain the CRR at 32.5% and Retain the Liquidity Ratio at 30%.
The apex bank has now increased the benchmark interest rate by 600 basis points since Russia invaded Ukraine in February 2022.