The Monetary Policy Committee of the Central Bank of Nigeria has voted unanimously to raise the interest rate to 13 per cent after two and half years of expansionary monetary policy.
The CBN Governor, Godwin Emefiele, said this while reading the communique of the 142nd monetary policy committee meeting in Abuja.
The rate which had been at 11.5 per cent since September 2020 has now been raised by the CBN in a bid to spur recovery from the latest inflation rate rising above 16 per cent.
The apex bank move is targeted at curbing the rising rate of inflation in the country, while still cautiously ensuring economic growth.
The MPC noted that the available data on key macroeconomic indicators suggest that the recovery of output growth will continue, but at a more subdued pace considering the unfolding domestic and external shocks to the economy.
The MPC added that the sharp rise in inflation in both the advanced and emerging economies driven by rising aggregate demand and by disruptions to the global supply chain due to the Russia-Ukraine crisis.
As for the domestic economy, the committee expects the upward trend to continue in light of the buildup of increased spending related to the 2023 general elections. Headline inflation stood at 18.92 per cent y/y, in April ’22.
Considering this, the committee decided to shift from its historically cautious approach to interest rates to a policy rate hike, while still adopting an accommodative approach to development finance initiatives that have helped the growth of the economy and supported recovery.
The committee is of the view that the interest rate of the development finance initiatives of the CBN should remain at five per cent at least till March 2023.
The MPC noted that loosening in the face of the rising policy rate in advanced economies may result in sharp rises in capital outflow, faster drying up of credit lines, and further inflationary pressure.
The MPC also noted that a hold stance could strengthen the perception that the CBN has abandoned its primary mandate of taming inflation.
The committee believes that tightening would help moderate the inflationary pressure and exchange rate depreciation as well as moderate the speed of capital flow reversals, provide an incentive for foreign capital inflows, and sustain remittances. Furthermore, tightening could moderate the FGN’s domestic borrowing as the government’s debt-service-to-revenue ratio has increased considerably in recent times and threatens debt sustainability.