CBN raises rate to 16.5%, unveils new naira notes

The Central Bank of Nigeria (CBN) raised the Monetary Policy Rate (MPR), the benchmark interest rate, by 100 basis points on Tuesday to 16.5 percent to fight inflation.

The fourth straight rate hike this year was announced after the two-day meeting of the Monetary Policy Committee (MPC) in Abuja.

Godwin Emefiele, governor of the CBN, said that the members of the MPC unanimously voted for further tightening to rein in inflation, with nine members voting for a 100 basis-point hike while two members voted for 50 basis points.

Nigeria’s headline inflation quickened a new 17-year high of 21.09 percent in October, up from 20.77 percent in the previous month.

“To all central banks, inflation is a very big challenge, the Russia-Ukraine war is still ongoing, the US is still raising rates and financial market conditions globally have tightened,” he said.

On the implication of the decision, analysts said the cost of borrowing will rise further, adding that it will lead to asset repricing, and negative impact on the equities market.

“It will increase the yields on fixed income securities, which may make consumers postpone current consumption for savings/investments, thus reducing inflation rate, all things being equal,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.

He said it may also help to reduce capital flight from the fixed income securities and encourage foreign portfolio inflows into the country, thus helping exchange rate stability in the foreign exchange market, all things being equal.

However, he said the hike in the MPR will increase the cost of funds for banks and corporates and may also lead to portfolio reallocation to the fixed income securities from the equity market, thus having negative implications on the equity market in the short-term.

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After the meeting, the MPC members unanimously voted to retain other parameters. The CBN retained the asymmetric corridor of +100/-700 basis points around the MPR, retained the cash reserve ratio at 32.5 per cent, and the liquidity ratio at 30 per cent.

Razia Khan, managing director and chief economist, Africa and Middle East global research at Standard Chartered Bank, said with significant pressures ahead, including tighter global conditions, the risk of slowing global growth, weaker oil prices and pressure on external reserves, FX reforms are more important than ever.

“While the CBN has taken comfort from the October slowing in month/month inflation, we are not sure how much can be read into this – especially given the likelihood of fuel subsidy reforms post-election and ongoing agri-pressure given recent climate-related risks. Lower inflation settings and the restoration of a better-functioning FX market would serve Nigeria well, given these challenges,” she said.

The CBN also announced that new naira notes will be unveiled by President Muhammadu Buhari on Wednesday (today).

Emefiele said the circulation of N500 and N1000 notes will reduce gradually, adding that their availability in large volumes was partly responsible for the inflationary pressures.

“We are no longer waiting for December 15th to unveil the new notes; the president has accepted to unveil the new currency on 23rd of November 2022,” he said.