Nigeria: CBN’s Interest Rate Hikes: A Cumulative 850 Basis Points in Seven Months

Under the leadership of Olayemi Cardoso, the Central Bank of Nigeria (CBN) has enacted a series of interest rate increases, known as Monetary Policy Rates (MPR), which serve as the benchmark for borrowing by commercial banks in Nigeria.

President Tinubu appointed Olayemi Cardoso as the CBN governor in September of last year, and he was subsequently named chairman of the Monetary Policy Committee (MPC) in February 2024.

At its initial meeting following Cardoso’s appointment, the CBN raised the MPR by 400 basis points to a record 22.75%, and this upward trend has continued. In the past seven months since Cardoso’s resumption, interest rates have been increased by a total of 850 basis points.

Most recently, during the MPC meeting last week, the CBN raised the interest rate by another 50 basis points to 27.25%, marking the fifth increase since February 2024. This decision surprised many financial analysts, who had anticipated a pause in further tightening due to a reported slowdown in inflation figures released by the National Bureau of Statistics (NBS).

Timeline of Interest Rate Increases: February – September 2024

• February 2024: The MPC increased the MPR by 400 basis points to 22.75%. Cardoso also announced an adjustment of the asymmetric corridor around the MPR from +100 to -700 basis points, alongside a raise in the cash reserve ratio (CRR) from 32.5% to 45%.
• March 2024: The MPR was raised by an additional 200 basis points to 24.75%. The CRR was retained at 45%, with the liquidity rate held steady at 30%.
• May 2024: The benchmark interest rate saw a further increase of 150 basis points, bringing it to 26.25%. The MPR corridor remained at +100/-300 basis points, with the CRR and liquidity rate unchanged.
• July 2024: The MPC again raised the interest rate by 50 basis points to 26.75%, while maintaining the CRR for Deposit Money Banks (DMBs) at 45% and the liquidity ratio at 30%.
• September 2024: The MPR was increased once more by 50 basis points to 27.25%.

Under Cardoso’s guidance, the CBN has implemented significant measures to ensure Nigerian banks are well-capitalized and capable of supporting economic growth. In November 2023, the CBN mandated banks to meet new capital thresholds by March 2026, which may require issuing new equity, merging with other institutions, or adjusting their licenses.

Reasons for the CBN’s Tightening Measures

During the latest MPC meeting, Cardoso revealed that 11 out of the 12 committee members approved the decision to tighten rates further. He announced that the MPR would be raised by 50 basis points from 26.75% to 27.25%, and the CRR for DMBs would increase by 500 basis points to 50%.

He noted a decline in headline inflation year-on-year in July and August, alongside relative stability in exchange rates across various market segments due to the CBN’s tight monetary policy. This approach aims to foster confidence, enabling economic agents to plan for the medium to long term. However, while food inflation has moderated, core inflation remains high, driven primarily by rising energy prices.

The CBN’s announcement comes as Nigeria’s inflation rate eased for the second consecutive month in August, now at 32.15%, according to the NBS.

Experts Caution Against Further Tightening

Commenting on the situation, Paul Alaje, Senior Partner at SPM Professionals, expressed concerns that the current policy may not yield the desired results. He noted, “Despite the 800 basis points increase this year, we continue to face stubborn inflation. You cannot raise rates indefinitely without consequences; this will likely crowd out investment opportunities and increase unemployment rates, which have risen to 5.3%.”

Development expert Bashir Yahaya echoed these sentiments, emphasizing the adverse effects of continued tightening on critical sectors such as manufacturing, real estate, and Micro, Small, and Medium Enterprises (MSMEs). He cautioned that escalating interest rates could lead to an imminent collapse of economic activities.

Yahaya urged collaboration with fiscal authorities to address underlying economic challenges rather than resorting to further rate hikes while inflation appears to be slowing.