The Central Bank of Nigeria (CBN) yesterday raised its benchmark interest rate, the Monetary Policy Rate (MPR) by 400 basis points from 18.75 percent to 22.75 percent.

The CBN also adjusted the Asymmetric Corridor around the MPR to +100/-700  from +100/-300 around the MPR.

CBN Governor, Mr. Olayemi Cardoso, disclosed this while briefing journalists on the outcome of the Monetary Policy Committee, MPC, held yesterday in Abuja.

Cardoso also disclosed that the MPC raised the  Cash Reserve Ratio (CRR) of banks  to 45% from  32 percent.  

The MPC however, retained the Liquidity Ratio at 30 percent.  

Cardoso said that the decision to jerk up the MPR   was to tackle the high rate of inflation and the large volume of liquidity in the system.

He said, “The committee’s decisions were centred on the inflationary and exchange pressures, projected inflation and rising inflation expectations.

“Members were concerned about the persistent rise in the level of inflation and emphasised commitment to reverse the trend, as the balance of risks lean towards rising inflation.

“The committee, however, acknowledged the trade-off between the pursuit of output growth and the taming inflation but was convinced that an enduring output expansion is possible only in an environment of stable economy.

“The balance of the argument was in favour of a considerable rate hike to drive down inflation substantially.”

  Insecurity driving inflation

On the effects of insecurity on inflation, the Cardoso said, “Members considered several factors driving inflation such as insecurity and infrastructure deficit and noted the role of fiscal policy in addressing these shortfalls, while reiterating the commitment of monetary policy support.”

He noted the negative impact of insecurity on inflation, especially given the disruption of farming in many food producing zones of the country.     

External Reserves rises to $34.5b

According to the governor, “Gross external reserves stood at $34.51 billion on February 20, 2024, compared with $32.23 billion at end-January 2024. The improvement was driven by reforms in the foreign exchange market and an increase in oil production amongst others.”

Reforms attract  $2bn 

“We should get to a level where the market can function properly and be able to attract liquidity.   Recently, past we have been able to, at least using certain monetary tools, we have been able to begin to attract liquidity into the system.  

“For example, you may be aware that more recently we attracted, over a short period of time,  up to $2 billion, as a result of tools that we used to calibrate interest rate.   The market moved towards greater transparency.”

  Clears another $400m backlog

The Governor said that his administration stood to clear the backlog of all verified FX claims, revealing an additional $ 400 million had just been paid out.

In addition,   he said that he was committed to meet outstanding genuine requirements.

$26bn suspicious transactions

  On crypto currency, Mr. Cardoso said that CBN had a responsibility to protect Nigerians.

The governor said, “We collaborate with other government agencies in this regard.   And through collaboration we have confirmed some of our fears.   Our concern that certain practices go on that indicate illicit flows going through a number of these entities, as suspicious flows at best.

“In the case of Binance, in the last one year alone, $26 billion has passed through Binance Nigeria from sources and user whom we cannot adequately identify.

“There is a lot that is going on now between the EFCC, the police and the Office of the NSA and in due course, as we have information to share, we will share with the public.

Analysts highlight impact of economy

Meanwhile financial analysts have said that the decision of the MPR will lead to higher interest rates in the fixed income markets, naira appreciation, and enhanced foreign investment inflows. They however said that the hike in MPR will increase cost of borrowings, reduce lending to the real sector with risk of lower growth in industrial   and agriculture sectors.    

Lending to real sector will decline 

Commenting, Co Founder, Comercio Partners Limited, Nnamdi Nwizu, said: “I expect to see rates of government securities go up, especially as banks will need to get liquidity to meet the new CRR requirements. “We might see lending to the real sector slow and also see issuance of Commercial paper and borrowing by companies also slow as cost of borrowing jumps.

“Hopefully we see the Naira strengthen as Foreign Portfolio Investments, FPIs’   come in to take advantage of higher rates and locals also find the rates more attractive.”

Higher yields on Fixed Income instruments

Also speaking, Head, Equity Research, FBNQuest Securities Limited, Tunde Abioye, said: “I expect that the monetary policy tightening and restrictive financial conditions will lead to a gradual appreciation of the naira in the near term.

“As expected, the fixed income market is expected to start reflecting the rate hike from tomorrow. As such, yields are bound to be elevated. This will be negative for existing holders of fixed income securities. However the high yields will be positive for FI purchases.  

“Also, I expect the equity market to take a hit from the MPC’s decision, as investors rotate out of equities into fixed income.

Also, banks should benefit from the rise   in market yields.”