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CBN hikes interest rate again to 16.5%

Emefiele

In efforts to curb rising inflation and relieve pressure on the naira, the Central Bank of Nigeria (CBN) yesterday increased its benchmark lending rate by additional 100 basis points to 16.5%.

As already predicted, the hike was announced by the CBN Governor, Godwin Emefiele, at the end of the Monetary Policy Committee (MPC) meeting in Abuja, the last for the year.

Emefiele explained that more tightening was necessary as prior increases were starting to show results.

This is the fourth consecutive rate hike and the highest rate since November 2002 (18.5%). It also brings the cumulative interest rate increase from 2022 to 500 basis points.

The Committee however maintained the MPR’s asymmetrical corridor at +100 and -700 basis points, and kept the Cash Reserve Ratio (CRR) at 32.5%, and liquidity ratio at 30%.

The CBN has maintained its strong attempts in the foreign exchange market to support the country’s plunging currency, even as the inflation rate continued to rise.

In October, Nigeria’s inflation rate reached a 17-year high of 21.09%, even as the apex bank also announced intentions to redesign some naira notes, which will be unveiled today, in efforts to stabilise Nigeria’s sinking currency, adding that there will be no extension of the exchange of the notes.

To consolidate previous gains, the Committee said it agreed to a further increase, in order to narrow the negative real interest rate margin; improve market sentiments; and further restore investors’ confidence.

The Committee reviewed the global economy and domestic environment amid external shocks, particularly the war in Ukraine, and the on-going normalization of monetary policy in advanced economies.

It also noted the consistent positive performance since the exit from the COVID-19-induced recession, driven by the non-oil sector and complemented by continued policy support from the fiscal and monetary authorities.

Defending its decisions, the MPC explained that it did not consider the loosening option, as this would undermine the gains of the last three policy hikes.

To consolidate previous gains, the Committee said it agreed to a further increase, to narrow the negative real interest rate margin; improve market sentiments; and further restore investors’ confidence.

The Committee underscored the need to continue to tighten but at a somewhat moderate pace, noting that holding the key policy rate unchanged at a period close to the December festive season and expected heavy spending ahead of the 2023 general elections would jeopardise the gains of previous policy rate hikes and plunge the economy deeper into the inflation trap.

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