Global Economic Outlook (G.E.O)
CBN Raises Interest Rate to Tackle Inflation. Vol. 90. May 23, 2022.
Dear readers, welcome to another edition of the Global Economic Outlook (G.E.O) - our weekly newsletter providing insights on the local and global economy. Today, we will discuss about the CBN’s decision to raise interest rate.
***
CBN Raises Interest Rate to Tackle Inflation
The Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR) to 13% from 11.5%, joining other countries across the world in tightening the economy. The MPR is the rate at which the CBN lends to commercial banks and is a major monetary tool used to tame inflation. This is the first time since 2016 that the apex bank will be increasing the MPR and it definitely has serious implications for the Nigerian economy.
In the statement made at the conclusion of the Monetary Policy Committee (MPC) meeting, the CBN noted that “Members expressed deep concern about the uptrend of inflationary pressure. Despite the gradual improvement in output growth, the committee noted that the current rise in inflation may be inimical to growth, and thus hinder the full recovery of the economy.”
It is clear from the statement released by the CBN that the MPC members were really in a dilemma when making the decision to hike the MPR and it is not difficult to see why. Nigeria’s economy is growing very slowly for an emerging economy as the country’s Gross Domestic Product (GDP) growth rate slowed down for the third consecutive time in the first quarter of 2022 to 3.11% after reaching a high of 5.01% in the second quarter of 2021 as can be seen in the chart below.
A slow growth in the economy should ordinarily lead to an expansionary monetary policy and the obvious action would have been to lower interest rate in a bid to stimulate the economy but the challenges facing Nigeria are multifaceted which therefore required a decision to be made based on prioritization. It is a fact the MPC also acknowledged in the statement released:
“While it may seem contradictory to raise rates in the face of fragile growth, this is the dilemma that most Central banks around the world are grappling with at the moment. Yet, on balance, it is quite clear and compelling that tackling inflation is more urgent in the sequence of policy objectives.”
Nigeria’s inflation rate has risen for the third consecutive month this year to 16.82%. The CBN target for inflation remains a single digit but that target has been beyond reach for years now. It is actually not difficult to see the effects of inflation as everyone can observe the persistent rise in prices in almost everything. The chart below shows Nigeria’s inflation rate from April 2021 till April 2022.
Having prioritized curbing inflation over stimulating the growth of the economy, it is unclear how effective the hike in the MPR will be but what is certain is that the lending rate in banks will rise higher which might be a blow for businesses seeking to obtain loans. It should be good news though for the conservative investors as it means that they will get a higher rate on their fixed income investments in Treasury bills and bonds.
***
What are your thoughts on the hike in MPR? Let us know in the comment section.
***
Inflation remains a threat to purchasing power. In this video, we look at five practical ways to stay ahead.
***
If you have any questions, send them to info@ecofinar.com or to any of our social media channels.
***
Please share this newsletter if you have found it insightful. The Global Economic Outlook (G.E.O) is a publication of Ecofinar and is a weekly newsletter on finance, investment and the economy. You can access past editions here. You can follow us on our Facebook and LinkedIn pages and subscribe to our YouTube Channel.
Contact us:
Ecofinar Financial Solutions
Email: info@ecofinar.com
Telephone: +234 8027957343
Twitter: @ecofinar
Website: www.ecofinar.com
All rights reserved by Ecofinar Financial Solutions.