The Central Bank of Nigeria announced that it raised its monetary policy rate to 15.5% following its latest Monetary Policy Committee meeting. By raising the key interest rate by 150 basis points, the central bank hopes to “narrow the negative real interest rate differential and curb inflation.” The rate hike comes just days after the naira’s parallel import rate against the dollar plunged to a new low.
narrowing the negative real interest rate
According to the Central Bank of Nigeria (CBN), members of the bank’s Monetary Policy Committee (MPC) “voted unanimously to raise the policy rate to narrow the negative real interest rate differential and curb inflation.” The vote raised Nigeria’s main interest rate, the Monetary Policy Rate (MPR), from 14% to 15.5%.
In a statement, the CBN said that MPC members decided to raise the MPR by 150 basis points because they felt that any attempt to loosen the policy rate would be harmful.
The option of loosening the policy rate was not considered at this [MPC] meeting because it would be very harmful to curb inflation… The committee thus voted unanimously to raise the monetary policy rate (MPR) and the cash reserve requirement (CRR): ten members voted to raise the MPR by 150 basis points, one by 100 basis points and another by 50 basis points.
Nigeria’s inflation rate rose 280 basis points in just four months, reaching 20.52% in August 2022. To stop further increases, the MPC said the CBN needs to “focus significant focus on adjusting inflation.”
Meanwhile, just days after the Nigerian currency’s exchange rate against the U.S. dollar plunged to an all-time low, the Bank decided to raise the MPR. According to a Bloomberg report, the naira’s parallel market exchange rate fell from 715 naira to the dollar to 720 naira to the dollar. At the formal market, one U.S. dollar had bought just under 440 naira.
Following this significant depreciation of the naira, the difference between the official exchange rate of the currency and the parallel market exchange rate has now widened to over 280 naira.
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