Monetary policy jumps 50 basis points: CBN’s bold move amid stubborn inflation

The Central Bank of Nigeria (CBN) has recently taken centre stage amid surging inflation and economic challenges, positioning itself as a crucial player in the nation’s financial climate.

With decisive actions aimed at curbing inflation and steering the economy towards stability, the CBN’s policy manoeuvres are set to impact the financial well-being and growth prospects of Nigeria for years to come.

The apex bank on Tuesday increased the Monetary Policy Rate (MPR) by 50 basis points, bringing it to 26.75 percent. This increment, part of a series of adjustments totaling 800 basis points in 2024, comes against the backdrop of a stubbornly high inflation rate, which rose from 33.95 percent in May to 34.19 percent in June.

This hike was a strategic effort to combat rising inflation, which had been steadily climbing. The MPR is crucial as it influences borrowing costs, investment decisions, and overall economic activity. By raising the MPR, the CBN aimed to curb inflation and stabilise prices.

“This hike was a strategic effort to combat rising inflation, which had been steadily climbing. The MPR is crucial as it influences borrowing costs, investment decisions, and overall economic activity.”

Regrettably, the inflation rate which reached 34.19 percent in June 2024, is the highest since March 1996. A significant factor driving this surge was food inflation, which hit a record high of 40.87 percent, according to the National Bureau of Statistics (NBS).

Rising costs of transporting farm produce, infrastructure bottlenecks, security challenges in food-producing areas, and the exchange rate pass-through all contributed to this relentless surge. The CBN faces the difficult task of taming food inflation without stifling economic growth.

The Central Bank of Nigeria (CBN) employs an asymmetric corridor around the Monetary Policy Rate (MPR), which is currently set at +500/-100 basis points. This approach offers flexibility in policy adjustments while focusing on inflation control.

Specifically, the corridor allows for significant adjustments in rates if necessary: the upper limit of 31.75 percent permits aggressive tightening if inflationary pressures escalate, making borrowing from the central bank expensive for banks.

This helps reduce the money supply. Conversely, the lower limit of 25.75 percent prevents the borrowing cost from falling too low, thereby supporting savings and avoiding excessive monetary easing that could destabilise the economy.

However, this approach also carries risks, such as potentially slowing down investment and credit expansion, which might hinder economic recovery.

Despite economic headwinds, Nigeria’s banking system remains resilient. Recent recapitalization efforts are also bolstering stability, and the CBN’s regulatory oversight ensures the continued soundness of banks.

However, there is a delicate balance between maintaining prudential measures and ensuring credit availability to support economic revival.

As Nigeria enters the second half of 2024, the CBN faces critical choices. Should it continue tightening policy or pause to assess the impact of previous rate hikes?

The challenge lies in orchestrating a balance between inflation control, exchange rate stability, and economic growth. Achieving this balance is essential for creating a stable and resilient economy that benefits all Nigerians.