While the US, UK and EU declare victory over inflation, in Nigeria, the fight goes on.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), in a unanimous decision, voted to raise the Monetary Policy Rate (MPR) by 50 basis points from 26.75% to 27.25% on the 24th of September and has signaled more tightening measures in the future.
This marks the fifth interest rate hike in the past eight months, resulting in a cumulative increase of 850 basis points.
The CBN also raised the Cash Reserve Ratio (CRR) for Commercial Banks by 5% (500 basis point), moving from 45% to 50% and for Merchant Banks by 2% (200 basis point), moving from 14% to 16%. The liquidity ratio remained the same at 30% and the Asymmetric corridor around the MPR remained the same at +500 -100.
Under CBN governor Yemi Cardoso, Nigeria has continued its more aggressive rate hike posture to combat inflation. Part of the committee’s expectations, apart from inflation, is to attract foreign exchange inflows and incentivise Nigerians to hold the Naira, by promising better real returns.
According to Cardoso, the policy move is to “sustain the downward trend in price development, contain emergent risk to inflation, stabilize the exchange rate and safeguard the banking system while also shielding the recovery of output growth.”
Since the last Monetary Policy Rate (MPR) adjustment in July, headline inflation has declined by 2.04% over the subsequent two months (July and August). The primary driver of headline inflation, food inflation, also registered a corresponding decrease of 3.35% during this period.
Mr Cardoso highlighted the upside risks to food inflation remain, “flooding, hike in energy prices, scarcity of PMS and most importantly, security in farming communities.”
Meanwhile, the core inflation rate has risen by 0.18% over the same period, primarily driven by increases in energy costs. “The uptrend (in core inflation) poses severe concerns to members as it clearly indicates the persistence of inflationary pressures,” Cardoso states.
While there was a downward trend in the inflation rate, the exchange rate experienced reduced volatility and increased stability between the end of July and August. The exchange rate appreciated by ₦6, strengthening from ₦1,610 per US dollar in July to ₦1,604 in August.
Also, the economy has transitioned from contraction to expansion between January and August, indicating that business activities have rebounded. This suggests that firms may have adapted and stabilized in response to recent fiscal and monetary policy adjustments.
The CBN Purchasing Manager Index (PMI) showed that business activities expanded from 48.8 points in January to 50.2 points in August.
Despite the recovery progress seen in the last two months, the fiscal policies, especially the increase in the prices of PMS from ₦617 to ₦897 in September, might offset the gains made in price development.
Mr Cardoso stated that “members of the committee expressed optimism that the upliftment of petroleum from the Dangote refinery will moderate transportation costs and significantly support the easing of food prices in the short and medium term.
“This is also expected to moderate foreign exchange demand for importing refined petroleum products, which will have a positive spillover effect on external reserves and improve the overall balance of payment position,” he further expressed.