The monetary policy committee of the central bank of Nigeria has increased the benchmark interest rate by 150 basis point from 14 percent to 15.50 percent on Tuesday 27th September 2022. This represents the third hawkish move by the apex bank in the year 2022.
The rate which had been held constant at 11.5% since September 2020 was increased to 13 percent and 14 percent in May and July 2022 respectively; in a bid to curb the rising inflation which has equally grown from 15.6 percent to 20.52 percent between January and August 2022.
In an attempt to mop up excess liquidity in the financial system; the Cash Reserve Ratio (which is the percentage of customers’ deposits with the Central Bank) was also raised to a minimum of 32.5 percent from 27.50 percent; while all other parameters were held constant.
The asymmetric corridor of +100/-700 basis points around the MPR was retained; and the liquidity Ratio was kept at 30 percent. The CBN governor also reiterated that the MPC will continue with its tightening policy; as long as inflation keeps surging.
It is expected that the hike in interest rate will immediately elevate short-term borrowing costs or the rate at which financial institutions borrow from the apex bank; and this will translate into higher costs of capital for businesses; manufactures and consumers.
It is equally expected that banks will be a major beneficiary of the interest hike, as their net interest income from loans and overdrafts will rise.
The hike will equally translate to higher returns for investors in the fixed income market; and lure investors in the equity market to move their funds into the fixed income market to take advantage of the hike.
In conclusion; it is evident that the monetary policy committee is ready to sacrifice growth for lower inflation rate; and stability of the Naira.
However; we do not see the aggressive rate hike curbing the persistent inflation growth; unless certain fiscal policy actions are put in place to boost productivity in the economy.