The CBN responds to rising inflation by raising the MPR to 14 percent

By Adeleye Kunle

Concerned about the sustained rise in headline inflation to a five-year high in May, the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, raised the Monetary Policy Rate (MPR) by 100 basis points (bps) to 14% from 13% yesterday.

The MPR serves as the reference interest rate for all other rates in the money market.

Yesterday’s increase is the second consecutive increase in the MPR in as many months, as the Committee raised the MPR by 150 basis points to 13% from 11.5 percent at its May meeting, for the first time since September 2020. The May 2022 mark-up marked a reversal of the apex bank’s monetary tightening policy and is aimed at addressing the persistent rise in the headline inflation rate, which has risen to 18.6 percent as of last month from the 2022 starting point of 15.6 percent, representing a 3000 bpts rise in just six months.

At a press conference following the MPC meeting in Lagos yesterday, CBN Governor Godwin Emefiele stated: “The MPC noted that the current upsurge in price levels remains a primary concern to monetary policy as Members focused on the optimal policy approach required to address this development while protecting the fragile recovery.”

“In terms of whether to tighten, loosen, or hold rates, members were unanimous and did not consider both loosening and retaining rates at current levels at this meeting.” This is because the MPC believed that loosening would worsen the economy’s liquidity situation and dampen the money market rates needed to stimulate savings and investment. Members also believed that loosening would cause the exchange rate to fall, which would then affect domestic prices. The MPC did not consider holding rates constant because the overall stance would imply that the bank is not responding adequately to pull global and domestic price developments as inflation numbers continue to trend aggressively upward. In terms of tightening policy, members agreed unanimously that given the aggressive increase in inflation, as well as the negative consequences, particularly for poor purchasing power, as well as slowing growth, there is a need to continue tightening.

“However, the committee was unanimous on the level of tightening required to drain inflation without dampening actual output, which would result in higher borrowing costs.”

Members were also of the opinion that tightening will signal the bank’s strong determination to aggressively address its price stability mandate and portray the MPC’s sensitivity to the impact of inflation on vulnerable households and the need to improve their disposable income.

“Members also noted that the committee’s previous 150 basis point hike in May had not permeated the economy sufficiently to halt the rising trend in inflation, and that the month-on-month percentage point increase in headline inflation rose sharply in June 2022 compared to May 2022.”

“MPC also noted that other complementary administrative measures implemented by the bank to address money supply growth did not moderate the inflationary trend.”

“As a result, the committee unanimously voted to increase MPR.” One member proposed raising the MPR by 150 basis points. Six members were out by 100 basis points, one by 75 basis points, and three by 50 basis points.

“As a result, the committee decided to raise the MPR by 100 basis points, from 13% to 14%.”

The RT200 earns $3 billion.

Meanwhile, Emefiele announced yesterday that the CBN signed a N20 billion rebate payment to exporters who participated in the RT200 foreign exchange program during the second quarter of the year.

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