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Central banks maintain economic growth and price stability by controlling inflation. If inflation rises, central banks tighten monetary policy by increasing interest rates or through other hawkish policies. If inflation falls and economic output declines, central banks lower interest rates and make borrowing cheaper. Most central banks pursue a slightly inflationary monetary policy to safeguard against deflation. This will attack both domestic and foreign investment.
The National Bureau of Statistics has reported that domestic headline inflation increased from 33.95 per cent in May 2024 to 34.19 per cent in June 2024, mostly due to the ongoing increase in the annual growth rates of food and core inflation. Likewise, headline inflation increased to 2.31 per cent in June 2024, up from 2.14 per cent in May 2023. The meal and center components increased from 2.28 per cent and 2.01 per cent in June 2024 to 2.55 per cent and 2.06 per cent in May, respectively. During the first quarter of 2024, real GDP increased by 2.98 per cent on an annual basis as opposed to 3.46 per cent during the 2023 Q4, fuelled by both the non-oil and oil sectors.
The CBN’s recent decisions by its Monetary Policy Committee at the 296th meeting included raising the MPR by 50 basis points, from 26.25 per cent to 26.75 per cent, adjusting the asymmetric corridor around the MPR from +100/-300 to +500/-100 basis points, maintaining the cash reserve ratio of deposit money banks at 45 per cent and merchant banks at 14.0 per cent, and maintaining the liquidity ratio at 30 per cent. This is a bold decision by the CBN as a key player in economic development.
With the rise of the MPR to 26.75 per cent, this marks the fourth consecutive increase since February 2024. The move is aimed at controlling the rising cost of living, which has been a significant issue since mid-2023. The MPR typically helps control the economy through mechanisms such as inflation control, exchange rate stabilisation, and encouraging savings.
By modifying the monetary policy rate, the CBN has once again shown its dedication to maintaining economic stability in the face of inflation. This calculated action to reduce the increasing inflationary pressures highlights the CBN’s proactive approach to navigate Nigeria’s intricate economic environment.
One essential instrument that central banks utilise to manage inflation is the MPR. By raising the MPR, the CBN essentially increases the cost of borrowing, which lowers the amount of money available for use in the economy. The goal of this monetary policy tightening is to reduce company investment and consumer expenditure, which will help to reduce inflation.
Nigeria has seen severe inflationary pressures in recent months due to a number of causes, such as disruptions in the country’s supply chain, an increase in the price of commodities globally, and financial difficulties at home. In an effort to preserve the value of the naira and stabilise prices, the CBN decided to raise the MPR in direct response to these pressures.
Money loses value due to inflation, which lowers household purchasing power and raises living expenses. A large percentage of the populace in Nigeria lives below the poverty line, and as such a high rate of inflation can have detrimental social and economic effects on the nation. The impoverished are disproportionately impacted by rising costs for necessities, which can exacerbate inequality and spark social unrest. In order to mitigate these negative impacts, the CBN’s intervention —MPR adjustment— is essential. Stability is necessary to draw in both domestic and foreign investment, which helps to create jobs and diversify the economy.
The CBN governor, Mr Olayemi Cardoso, has reaffirmed that the Monetary Policy Committee will do whatever is necessary to tackle high inflation in the country. He emphasised that interest rates would stay high for as long as necessary to tackle inflation. The CBN’s hawkish stance on inflation was evident from the first MPC meeting in February, where the benchmark lending rate was raised by 400 basis points to 22.75 per cent. High rates will not discourage investment and production and the foreign exchange market will moderate. This will make investors more comfortable with the market.
Outlining the policy direction for 2024, the CBN will be prioritising price and exchange rate stability to promote sustainable economic growth. Through monetary and price stability with targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, the bank is committed to achieving an economic stability.
The CBN will be repositioned as a catalyst for economic stability and growth, working with stakeholders to formulate policies that create an enabling environment conducive to sustained economic growth and development. This will create transparency and a market environment that allows fair determination of exchange rates, working with experts to develop de-risking instruments that encourage private sector investment in key industries such as housing, textile and clothing, food supply chain, healthcare, and educational supplies.
In the short term, the MPR can help control inflation by reducing spending and encouraging savings and management of economic growth. In the medium term, the policy can effectively control inflation, stabilise prices for goods and services, and bring stability in the exchange rate by attracting foreign investment and strengthening the naira. However, it is realistic to expect some economic slowdown due to reduced borrowing and job creation. Nevertheless, if the measures control inflation successfully, it can lead to a more stable economic environment in the long term, as stable prices help people plan and invest for the future.
Chiroma writes from Abuja
