Central banks use inflation targeting to maintain economic growth and prices stability, with an inflation target. If inflation rises, central banks tighten monetary policy by increasing interest rates or 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 reports that domestic headline inflation increased from 33.95 percent in May 2024 to 34.19 percent in June 2024, mostly due to the ongoing increase in the annual growth rates of food and core inflation. Likewise, headline inflation increased month over month to 2.31 percent in June 2024, up from 2.14percent in May 2023. The meal and center components increased from 2.28 and 2.01% in June 2024 to 2.55 and 2.06% in May, correspondingly. During the first quarter of 2024, real GDP increased by 2.98 percent on an annual basis as opposed to 3.46 percent during the 2023 fourth quarter, fueled by both the non-oil and oil sectors.
The CBN’s recent decisions by its Monetary Policy committee at the 296th meeting include raising the MPR by 50 basis points, from 26.25% to 26.75%, adjusting the asymmetric corridor around the MPR from +100/-300 from+500/-100 basis points, maintaining the Cash Reserve Ratio of Deposit Money at 45.00% and Merchant Banks at 14.0%, and maintaining the Liquidity Ratio at 30.00%. This is a bold decision by the CBN as a key player in economic development.
With the rise of the MPR to 26.75%, 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 stabilization, and encouraging savings.
By modifying the monetary policy rate, the Central Bank of Nigeria (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 utilize to manage inflation is the monetary policy rate. 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 stabilize 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, 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—adjusting the MPR—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, Dr. Olayemi Cardoso, has reaffirmed that the Monetary Policy Committee will do whatever is necessary to tackle high inflation in the country. He emphasized 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%. High rates would not discourage investment and production and the foreign exchange market would moderate. This will make investors more comfortable with the market.
Outlining the policy direction for 2024, CBN will be prioritizing 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 for 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, textiles 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, stabilize 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.
