The Central Bank of Nigeria (CBN) raised its interest rate to 27.5% during its last meeting of the year, following a significant surge in inflation in October. The Monetary Policy Committee (MPC) increased the benchmark interest rate by 25 basis points to address escalating inflationary pressures.
Priority in the fight against price changes
The meeting was held amidst renewed concerns over food and core inflation, both of which saw year-on-year increases in October 2024. Consequently, all members collectively agreed to prioritize combating price instability, said Governor Olayemi Cardoso during a press conference on Tuesday.
The interest rate hike follows a stronger-than-expected economic performance in Nigeria in the third quarter of 2024. The country’s GDP grew by 3.46 %, primarily driven by the expansion of the services sector.
Adjustments to the MPR
The Central Bank of Nigeria incorporates adjustments to the Monetary Policy Rate (MPR) as part of its monetary policy strategy while maintaining other fixed rates. The MPR is a critical tool employed by the central bank to control inflation and ensure monetary stability. By adjusting this rate, the bank influences lending costs and consumer spending, which in turn impacts economic growth.
The preservation of the Cash Reserve Ratio (CRR) and the Liquidity Ratio (LR) reflects the bank’s approach to liquidity management. These rates are essential to ensure financial institutions have adequate capital to meet their obligations and support economic development.
Banks : Main beneficiaries of this measure
Since the beginning of the year, the MPC has raised the benchmark rate by 8.75 percentage points to combat inflation. Nigeria’s headline inflation surged to 33.8 % in October, driven by rising fuel prices and flooding in key food-producing regions, which affected consumer prices.
The recent interest rate hike is expected to further boost the net interest income of Nigerian banks. The country’s four largest banks—Guaranty Trust Holding Co., Zenith Bank Plc, United Bank for Africa Plc, and FBN Holdings Plc—have all reported more than double their net interest income.
In addition to adjusting the MPR, the MPC decided to maintain the current CRR for deposit money banks at 50 % and for merchant banks at 16 %. Furthermore, the Liquidity Ratio remains unchanged at 30 %.
The asymmetric corridor, which represents the range within which the MPR can fluctuate, will also remain at its current levels of +500/-100 basis points around the MPR. This corridor determines the rates at which the central bank lends to or accepts deposits from financial institutions.
Take action to address structural weaknesses
« The rate hike could lead to an increase in loan defaults, which would, in turn, affect the non-performing loan ratio », said Samuel Onyekanmi, an analyst at Norrenberger. Analysts warn that aggressive interest rate hikes in Nigeria, without corresponding fiscal measures, may not be sufficient to control inflation.
To effectively curb inflation, the government must address the structural weaknesses that have caused inflation spikes. Without these measures, the CBN faces an uphill battle, and the fight against inflation will persist.
