Nigeria’s Central Bank Raises Interest Rate To Curb Inflation

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News in brief: The Central Bank of Nigeria (CBN) has raised the interest rate within the country by 50 basis points to 18.5%, aiming to curb inflation. Despite past increases, the economy has not slowed down as expected.

The Central Bank of Nigeria (CBN) announced that its Monetary Policy Committee (MPC) is raising Monetary Policy Rate (MPR) by 50 basis points, taking it from 18.0% to 18.5%.

MPR is the rate at which the central bank lends to commercial banks. It provides a benchmark for all other interest rates in the country’s economy. Typically, when this rate rises, it leads to higher borrowing costs which should reduce economic activities and inflation.

However, Nigeria’s economy is not known to behave ‘typically’. Inflation has been rising in 2023 despite several MPR upward moves. In January, CBN raised interest rate from 16.5% to 17.5% after raising it by similar margin in November 2022.

Other CBN monetary tools stay the same

Besides the MPR rising, the bank said that it is retaining the Cash Reserve Ratio (CRR) at 32.5%, Liquidity Ratio (LR) at 30.0% and Asymmetric Corridor at +100/-700 basis points around the borrowing rate.

The CRR is another regulation tool that tells commercial banks how much cash they must keep in their reserves with the central bank. 32.5% is the proportion of bank deposits they must keep with the CBN, while the remaining (67.5% in this case) is available for them to conduct business with.

Meanwhile, the LR mentioned in CBN’s announcement means what percentage of commercial bank deposits liabilities they must keep in liquid assets. In simpler terms, it is the portion of deposits in a form they can easily convert to cash if the need arises.

Finally, the asymmetric corridor in the tweet above is the ‘flexibility’ the CBN allows for banks it regulates. +100 basis points mean that they can raise interest rates as high as 1 per cent or 19.5% and -700 means it can go as low as 7 per cent or 11.5%.

Likely, the width of the asymmetric corridor being 800 basis point is the culprit behind the economy not slowing down. Although, there could be other reasons like increased government spending, rising commodity prices, and more.

Obinna Onwuasoanya
Obinna Onwuasoanya
Obinna Onwuasoanya is a tech reporter of over five years, fiction writer, SEO expert and an editor. He is based in Lagos, Nigeria, and was previously shortlisted for the Writivism Short Story Prize 2018.

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