According to the Central Bank of Nigeria, it raised its monetary interest rate from 15.5% after the last meeting of its Monetary Policy Committee. By increasing the key interest rate by 150 basis points, the central bank hopes to “narrow the negative real interest rate gap and rein in inflation.” The rate increase came just days after the naira’s parallel exchange rate against the dollar plunged to a new low.
Reducing the gap between negative real interest rates and their positive counterparts
According to the Central Bank of Nigeria (CBN), members of the bank’s monetary policy committee (MPC) have voted “unanimously to raise the policy rate to narrow the negative real interest rate gap and rein in inflation.” Following the vote, Nigeria’s key interest rate — the monetary policy rate (MPR) — now stands at 15.5%, up from 14%.
CBN released a statement stating that they decided to raise MPR 150 basis points as MPC members thought it was harmful to reduce the policy rate.
Here are the details [MPC] meeting, the option to loosen the policy rate was not considered as this would be gravely detrimental to reining-in inflation … The Committee thus voted unanimously to raise the Monetary Policy Rate (MPR) and the Cash Reserve Requirement (CRR). Ten members approved raising the MPR to 150 basis points. One member voted for 100 and one member for 50.
Nigeria’s inflation rate, which has now grown by 280 basis points in just four months, stood at 20.52% in August 2022. To stop it from growing further, the MPC said it is necessary for the CBN to ensure that “significant focus [is] be given to taming inflation.”
Meanwhile, the bank’s decision to hike the MPR came just days after the Nigerian currency’s exchange rate against the U.S. dollar plunged to a new all-time low. According to a Bloomberg report, the naira’s parallel market exchange rate had dropped from 715 naira for every dollar to 720 naira per dollar. One U.S. Dollar was worth just 440 Naira on the official market.
Following the naira’s latest significant depreciation, the spread between the currency’s official and parallel market exchange rate has now widened to over 280 naira.
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