Nigeria’s central bank extended its longest cycle of monetary tightening in years, keeping the focus on fighting inflation and disregarding a call by President Bola Tinubu for borrowing costs to be lowered.
The monetary policy committee on Tuesday raised its benchmark to a record 18.75% from 18.5%. Economists surveyed by Bloomberg were divided, with most forecasts for an increase of a quarter-percentage point.
The meeting was the first led by acting Governor Folashodun Shonubi, who last month replaced Godwin Emefiele following his arrest on charges of illegally possessing a firearm.
Tinubu has said that high rates are stifling economic growth and should fall to encourage spending. Since taking office in May, he’s implemented several reforms including ending fuel subsidies and liberalizing the foreign-exchange market.
The balance of arguments around the need to tame inflation — while also supporting investment and a recovery in economic growth — “leaned in favor of a moderate rate hike to sustain efforts aimed at anchoring inflation expectations, narrow the negative real interest-rate gap and improve investor confidence,” Shonubi said in Abuja, the capital.
Nigeria’s dollar bonds extended their advances after the decision. The yield on the nation’s 2027 securities was down five basis points to 9.9% as of 9:32 a.m. in London.
The MPC said it expects the economy to grow 2.7% this year, down from a forecast of 3% in May. Tinubu’s administration is targeting growth of at least 6% a year.
The rate decision came after a split vote. Of the 11 MPC members who attended the meeting, four supported a 25 basis-point hike, two favored a 50 basis-point increase and the rest preferred a hold.
‘Other Tools’
While the rate hike was modest given the magnitude of inflation challenges in Nigeria, the reference to the use of “other tools in the toolbox” to curb inflation is of greater interest, said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Plc.
“The CBN’s use of a more punitive cash reserve ratio for banks not meeting the minimum loan-to-deposit ratio could be a means of liquidity management,” Khan said.
The MPC has increased rates by 725 basis points since May 2022 to rein in inflation that’s been at more than double the top end of its 6% to 9% target range for over a year.
Consumer prices rose near 23% in June — the fastest pace in almost 18 years. The inflation rate has been kept high by rising food prices and is expected to remain elevated for some time.
Money supply rose 32% in June from a year earlier, compared with 14% in May, and gasoline prices have more than tripled since the scrapping of the fuel subsidy. The currency has meanwhile dropped about 40% against the dollar after the easing of foreign-exchange controls last month.
All MPC members also voted to narrow the central bank’s asymmetric corridor, which means the cost at which lenders borrow is at 100 basis points above the monetary policy rate, and the return on their deposits at 300 basis points below the benchmark.
The rate hike will add to other measures taken by the government to try reduce the inflation rate including a state of emergency that would allow the authorities to take exceptional steps to improve food security and supply.
The government has also approved 500 billion naira ($633 million) of spending to cushion the impact of the removal of the gasoline subsidies and raised $500 million to transform food production. Tinubu is also taking steps to improve security in the country, where a decade-long insurgency by Islamist militants and attacks by bandits have curbed farm output.
--With assistance from Simbarashe Gumbo, Paul Richardson, Emele Onu and Colleen Goko.
(Updates with markets, analyst comments starting in sixth paragraph.)
Author: Ruth Olurounbi and Anthony Osae-Brown
