The Central Bank of Nigeria’s Monetary Policy Committee (MPC) meetings in May and July 2024 saw notable developments in their approach to addressing economic challenges, according to an update posted on the CBN’s website.
To begin with, in the May 2024 meeting, the MPC increased the Monetary Policy Rate (MPR) by 150 basis points, raising it to 26.25 per cent from 24.75 per cent. By the July 2024 meeting, the MPR was further raised by 50 basis points to 26.75 per cent. This reflects a continued effort to curb inflationary pressures.
The May meeting highlighted ongoing inflationary pressures, especially that which is driven by food prices, and stressed challenges like transportation costs and security in food-producing areas. The July meeting maintained this focus on combating inflation while acknowledging modest increases in the inflation rate.
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In both meetings, other key monetary parameters, such as the Cash Reserve Ratio (CRR) and the Liquidity Ratio, were retained at 45 per cent and 30 per cent, respectively. The asymmetric corridor around the MPR remained at +100/-300 basis points during the May meeting, but was changed to +500/-100 in July, 2024.
The MPC observed continued volatility in the foreign exchange market, attributed to seasonal demand and the dynamics of a free-market system. The Committee, therefore, emphasised the need for stable foreign reserves.
Discussions in both meetings included the broader economic context, with recognition of challenges like geopolitical tensions and global supply chain disruptions. The July meeting continued to monitor these developments while considering their impact on domestic policies.
These differences reflect the CBN’s ongoing strategy to closely monitor and manage inflation, and stabilise the Naira while fostering a conducive environment for economic growth and investment.
The MPC meeting of the Central Bank for the month of July held on Monday, July 23 and Tuesday July 24, 2024. Olayemi Cardoso, governor of the CBN and Chairman of the Committee, read the Communique of the meeting, highlighting the decisions of the Committee and fielded questions from journalists at the Bank’s Head Office in Abuja on July 24, 2024.
In simplified terms, the MPR, which is the benchmark interest rate at which the CBN lends to commercial banks, was increased by 0.5 per cent, from 26.25 per cent to 26.75 per cent. This move is intended to control inflation by making borrowing more expensive, which can reduce spending and slow down price increases.
The asymmetric corridor around the MPR was changed. Previously, it was set at +100/-300 basis points, meaning the rates could fluctuate slightly above or more below the MPR. Now, it is adjusted to +500/ 100 basis points. This change allows for greater flexibility in how interest rates can be applied to control money flow in the economy.
To explain the asymmetric corridor in simple terms, the positive side shows the standing lending rate at which the CBN lends to Deposit Money Banks (DMBs). In this case, if a bank wants to borrow money from the CBN, they would borrow at an interest rate of 26.75 per cent plus 500 basis points which would be equal to 31.75 per cent. On the other hand, the negative figure shows how much interest the CBN will pay a bank who wishes to deposit money with the CBN overnight. “So, using our analogy above, if a bank has excess money and wants to deposit its surplus with the CBN, the CBN would pay an interest rate of 26.75 percent minus 100 basis points which would be equal to 25.75 per cent. In this way, the CBN discourages banks from making deposits with the CBN and rather encourages them to lend to the real sector and stimulate growth,” the apex bank said in its July 2024 update published on its website.
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The CRR, which is the percentage of a bank’s total deposits that must be held in reserve and not lent out, remains unchanged. It stayed at 45 per cent for banks and 14 per cent for Merchant Banks.
This is to ensure that banks have enough money available and do not lend too much, which could lead to inflation, the CBN said.
For the Liquidity Ratio, the MPC retained at 30 per cent, this ensures that banks have enough cash or easily convertible assets to meet short-term obligations. This helps maintain stability in the banking system.
The MPC said it was aware that increasing prices (inflation) are affecting households and businesses. Their goal, therefore, is to control inflation and stabilise prices. According to the MPC communique, food prices are rising due to insecurity in food – producing Areas, as well as high transportation costs, due to activities of middlemen. The Committee, thus, emphasised collaboration with the government to address these issues.
The MPC noted improvements in foreign exchange management, with narrowing spreads between the various exchange rates (Nigerian Autonomous Foreign exchange Fixing and BDC), which indicates better market efficiency. The Committee also noted stability in the Nigerian banking system but urged that ongoing monitoring should be sustained given that banks in the country were currently undergoing recapitalisation.
While basing its decisions on the economic context, the Committee said it is taking steps to moderate Headline inflation in Nigeria which rose to 34.19 per cent in June 2024 by implementing policies that will control aggregate demand.
