The Central Bank of Nigeria (CBN) has announced a significant increase in the interest rate, raising it by 50 basis points to a new level of 27.25%. This marks the fifth consecutive hike since February 2024, reflecting the CBN’s ongoing efforts to combat inflation and stabilize the economy. CBN Governor Olayemi Cardoso disclosed this decision during a press briefing following the 297th Monetary Policy Committee (MPC) meeting in Abuja on Tuesday.
In addition to the interest rate adjustment, the CBN also raised the Cash Reserve Ratio (CRR). For Deposit Money Banks, the CRR increased from 45% to 50%, while for Merchant Banks, it went up from 14% to 16%. The CBN has decided to maintain the Liquidity Ratio (LR) at 30%, and the Asymmetric Corridor remains at +500/-100 basis points around the Monetary Policy Rate (MPR). These measures are designed to manage liquidity in the banking sector and support monetary stability.
This latest increase comes at a time when Nigeria’s inflation rate has shown signs of easing. According to the National Bureau of Statistics (NBS), the inflation rate fell to 32.15% in August, marking a decline for the second consecutive month. This decrease in inflation may provide some relief to consumers, but the CBN remains focused on controlling price levels through tighter monetary policy.
In the previous MPC meeting held in July 2024, the CBN had raised the interest rate to 26.75%. Since the beginning of 2024, the central bank has been on a trajectory of increasing rates to curb inflationary pressures, moving from an initial rate of 22.75% earlier this year.
The decision to raise the interest rate has important implications for the economy. Higher interest rates typically lead to increased borrowing costs for individuals and businesses, which can slow down economic activity. While the CBN aims to reduce inflation through these hikes, it must balance this goal against the potential impact on growth.
Interestingly, this announcement comes just days after the United States Federal Reserve announced a significant cut to its interest rate by 0.5%, marking the first reduction since July 2023. This contrast highlights differing economic conditions and monetary policies between Nigeria and the United States.
Economist Muda Yusuf, who serves as the Executive Director of the Centre for the Promotion of Private Enterprise, has urged the CBN to pause further interest rate increases, emphasizing the need for a more measured approach to monetary policy.
To understand the current rate, it’s essential to note that before Governor Cardoso’s appointment in September 2023, Nigeria’s interest rate stood at 18.75%. The aggressive series of rate hikes since February 2024 reflect the CBN’s commitment to managing inflation and stabilizing the economy amidst global economic challenges.
As the CBN implements this latest interest rate hike, all eyes will be on the economy’s response. The central bank’s actions will continue to play a critical role in shaping Nigeria’s economic landscape in the coming months. Stakeholders, including businesses and consumers, will need to adapt to these changes as they navigate the complexities of a high-interest-rate environment.
