CBN Takes Interest Rate To 22.75%

• CRR moves from 32.5% to 45.0%
• Move ‘simply an overkill’ – Prof Uwaleke

BY COBHAM NSA – On the day that Nigerian workers hit the nation’s streets protesting the biting economic hardship in the country, the Central Bank of Nigeria (CBN) has raised its benchmark interest rate to 22.5 percent

This CBN’s Monetary Policy Committee (MPC) move represents 400 basis points raise in the Monetary Policy Rate (MPR) from the current 18.75 percent.

The CBN Governor, Mr Olayemi Cardoso, who disclosed this while highlighting outcomes of the first MPC meeting held under his watch in Abuja today, said the decision aims to tame the stubborn inflation that refuses to respond appropriately to the previous marginal increase in the rates.

The MPC meeting attended by all 12 members resolved to further tighten monetary policy as follows:
1. Raise the MPR by 400 basis points to 22.75 from 18.75 per cent.
2. Adjust the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points.
3. Raise the Cash Reserve Ratio from 32.5 per cent to 45.0 per cent.
4. Retain the Liquidity Ratio at 30 per cent.

The CBN Governor while disclosing that gross external reserves stood at US$34.51 billion on February 20, 2024, compared with US$32.23 billion at end-January 2024, said the improvement was driven by reforms in the foreign exchange market and an increase in oil production amongst others.

However, he stated that the MPC will continue to monitor developments in the global and domestic economies to ensure that inflationary and exchange rate pressures moderate in the near term.

Also hinting that the next MPC meeting is slated for 25th and 26th of March 2024, Mr Cardoso said over $23 billion pass through Binance with proper tracking by the apex bank in Nigeria.

Meanwhile, reacting to the MPC’s move, Professor of Finance and Capital Market, Uchenna Uwaleke, described as “simply an overkill” jerking up the MPR by 400 basis points in one fell swoop.

The University Don queried why the apex bank did not consider a raise of not more than 200 basis points since they have another opportunity to meet next month and review impact?

Also, the former Imo State Commissioner of Finance and current Special Adviser to the Senate Committee Chairman on Banking, Insurance, and Other Financial Institutions, Senator Mukhail Adetokunbo Abiru, noted thus; “They didn’t stop at MPR, they also jerked up the CRR to 45 percent which at the previous level of 32.5 percent was among the highest in Sub Saharan Africa.

“The CBN Governor had assured that policies of the bank would be evidence-based. Which empirical results support this aggressive move? I pity the real sectors of the economy.

“The implication is that for every deposit in the bank, CRR takes 45 percent of it while Liquidity ratio takes 30 percent. So, it is only 25 percent of the deposit that banks can lend!

“This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government and asset quality of banks.”

Insisting that the CBN’s decision “is not a welcome development”, Prof Uwaleke, who lectures at Nasarawa State University, Keffi,  further said; “Expect banks to quickly reprice their loans with negative consequences for non performing loans and financial soundness indicators.

“By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non monetary factors driving it, output is bound to shrink. So, expect lower GDP numbers, especially from Agric and Industry sectors as well as a surge in unemployment levels.”

Before Cardoso came on board in 2023, Nigeria’s MPC had constantly endorsed the strategy of gradual increase in the MPR over four consecutive meetings.

Additionally, other important indices, such as Liquidity Ratio and Cash Reserves Ratio (CRR) had remained constant amid all the aggressive measures put in place by the apex Bank. In the process, the CRR stayed at 32.5 percent while the Liquidity Ratio remained at 30.0 percent.

Also, other steps at addressing the turbulence in the financial market had seen the Nigerian authorities urging telecommunications firms to restrict access to the websites of crypto-currency firms such as Binance, OctaFX, Coinbase and others.

The development came months after the CBN issued guidelines to govern digital asset operators’ activities with Crypto users in the country struggling to access exchanges’ websites like Binance and OctaFX.

Against the backdrop of these challenges, Binance’s P2P platform also placed limits on USDT sales, causing trading issues for many users.