CBN Increases MPR To 18% As Inflation Accelerates To 21.91%

Economist Cautions CBN Against Discouraging Investors Amid Reforms

The Central Bank of Nigeria, CBN has moved the motion for the increase of Nigeria’s Monetary Policy Rate to 18% from the previous 16.5% which it was raised to in November 2022.

According to the communique released by the Monetary Policy Committee after its meeting held on Monday 20th and Tuesday 21st March 2023 which had in attendance 12 members who all voted in favor of the increase made this decision amidst the concerns for the recent bank failures in the United States and Switzerland, with widespread monetary policy restriction which is spreading across the country.

Meanwhile, domestically, Nigeria’s economic output has progressed moderately however with inflation numbers going upwards and a marginal increase in food inflation, the MPR also assessed this with the general economic outlook released by the International Monetary Fund (IMF).

The communique reads thus “In the Emerging Markets and Developing Economies, the unfolding tight external financing conditions and shock spillovers from the Advanced
Economies could further dampen the recovery of output growth. In light of these developments, the International Monetary Fund (IMF), in its January 2023 World Economic Outlook, forecasted global output growth for 2023 at 2.9 percent, compared with 3.4 percent in 2022. Growth is, however, expected to improve to 3.1 percent in 2024.”

The monetary policy admitted the certain key factors which are expected to keep inflation above the long-run target of several central banks which were named as thus “the persisting disruption to energy markets associated with continued war between Russia and Ukraine; high commodity prices; and general disruptions to the global supply chain associated with uncertainties around the COVID-19 pandemic in China and the ongoing tensions between the US and China over Taiwan’s sovereignty”

The committee also considered the global financial markets and the renewed fears of investors to move away from the equities market to safer assets such as gold and others stake their money on treasury securities which yield higher returns. It is expected that with several advanced economy and central banks moving forward with monetary policy normalization, global financial conditions will likely remain tight and might reinforce the reassignment of financial portfolios which reflect the fears of investors.

Data from the Nigeria Bureau of Statistics (NBS) showed good numbers with the GDP experiencing a 3.10% growth in 2022 and a 3.52% growth (YoY) in the fourth quarter of 2022. The economy reflects a positive look while maintaining a positive growth trajectory for the past few months since the recession in 2020. This is largely attributed to sustained growth in the services and agricultural sectors, a rebound in economic activities, and continuous intervention which enhanced growth in the banking sectors and provides good projections for further growth in 2023 and 2024.

Although, the committee also expressed worry over the marginal increasing inflation (YoY) especially in February 2023, which grew from 21.82% in January to 21.91% in February. This increase is believed to be caused by little increase in food components which rose from 24.32% in January to 24.35% in February with other core components moderating to 18.84% in February 2023.

The little increase in the food component is driven by the high cost of transportation of food items, lingering security challenges in major food-producing areas, and infrastructural challenges which are causing clogs in the food supply chain.

Meanwhile, the committee also noted stability in the banking sector which is reflected in the performance of the Financial Soundness Indicators (FSIs) and Capital Adequacy Ratio, and the Non-Performing Loans ratio remains moderate. While, growth was also observed in the equities market in the same reviewed period, with the All Share Index (ASI) and Market Capitalization  (MC) both increasing to 54,915.39 and N 29.92 trillion as of March 17, 2023.

However, there was a marginal decline in the gross external reserves which reduced to $36.13 billion in February 2023 from $36.4 billion in January 2023, which is a result of the decline in crude oil prices due to global economic uncertainty.

The committee concluded that the decision to increase the MPR has since had a moderate effect on inflation, despite the recent bank failures in the US and Switzerland and a following persistent increase in interest rates in the US.

The committee also concluded that despite the continued impact of the exchange rate on domestic prices levels, it is optimistic that the RT200 FX programme will continue to make progress and other policies such as Naira-4-Dollar aimed at attracting diaspora remittance would continue to improve the growth of Nigeria’s foreign external reserves and improve liquidity in the foreign exchange market.