The Central Bank of Nigeria (CBN) has once again raised its benchmark interest rate, known as the Monetary Policy Rate (MPR), to 26.75%, up by 50 basis points from 26.25%. This decision, announced after the Monetary Policy Committee’s (MPC) 296th meeting on Tuesday, July 23, 2024, highlights growing inflationary pressures affecting Nigerian households and businesses.
The MPR serves as the interest rate at which the CBN lends to commercial banks, and this hike is aimed at curbing inflation by reducing the money supply in circulation, making borrowing costlier.
CBN Governor Olayemi Cardoso noted that the Committee remains determined to ensure price stability despite the headline inflation for June rising to 34.19%, with food inflation climbing to 40.87%. He emphasized that ongoing monetary policies, along with fiscal measures targeting food supply, are expected to gradually moderate inflation.
Additional resolutions from the MPC include revising the asymmetric corridor around the MPR to +500/-100 basis points, maintaining the cash reserve ratio (CRR) at 45% for commercial banks and 14% for merchant banks, while retaining the liquidity ratio at 30%.
The CRR refers to the portion of a bank’s deposits that must be kept in reserve, while the liquidity ratio ensures banks hold sufficient liquid assets to meet short-term obligations.
Financial analysts had anticipated the rate hike due to persistent inflationary trends. However, experts at Afrinvest expressed concern over the potential impact on businesses, particularly regarding debt-related interest expenses, alongside other economic challenges like currency volatility.
The revised asymmetric corridor implies a significant rise in the cost of borrowing for commercial banks through the Standing Lending Facility (SLF), now set at 31.75% annually compared to 27.25%. Conversely, banks placing excess funds with the CBN through the Standing Deposit Facility (SDF) will earn a lower rate of 25.75%, widening the spread between SLF and SDF to 600 basis points.
Afrinvest highlighted that banks borrowed approximately ₦73.6 trillion via the SLF window between January and July 2024, nearly 8.5 times the volume seen at the SDF window. This shift is expected to pose challenges for banks as they manage risks and returns.
The Nigerian stock market reacted negatively to the CBN’s announcement, with the All-Share Index (ASI) on the Nigerian Exchange Group (NGX) declining to 100,487.12 points on Tuesday, down from 100,568.60 points the previous day. Market capitalization dropped to ₦56.898 trillion, reflecting a loss of ₦46.7 billion or a 0.08% decline in equity value.
Meanwhile, the CBN is set to auction three treasury bills in the Primary Market Auction (PMA) today. The instruments include 91-day bills valued at ₦16.48 billion, with advised rates between 16% and 16.90%; 182-day bills worth ₦6.44 billion, with expected rates from 17.20% to 17.80%; and 364-day bills valued at ₦255.04 billion, with rates ranging between 19.50% and 21.90%.
According to Meristem Securities, the most recent PMA saw a decline in total offerings to ₦166.11 billion, marking a 27.1% drop from the ₦228.71 billion offered previously, though it remains significantly higher than the amounts recorded earlier this year.
The monetary tightening reflects the CBN’s aggressive stance in tackling inflation, but its ripple effects on borrowing costs and equity markets will likely challenge businesses and investors in the months ahead.
