The Central Bank of Nigeria (CBN), during its recent Monetary Policy Committee (MPC) meeting, voted unanimously to raise the benchmark interest rate to 14%, the second such interest rate hike in the year.
The committee resolved to increase the MPR by 100 basis points from 13% to 14% following the rising cost of goods and services in the country. The National Bureau of Statistics (NBS) reported last week that Nigeria’s inflation rate rose to 18.6% in June 2022, up from the 17.71% recorded in the previous month.
In the meeting that started on Monday, 18th July 2022 and which lasted for two days, the committee resolved that the most rational policy option would be to further tighten its hawkish stance to effectively curtail the rising trend of inflation in the country.
The hawkish move of the apex bank was deemed necessary following the rising trend of inflation across the globe. Members of the committee were unanimous in deciding that the aggressive increase in inflation and its resultant negative consequences, particularly on the purchasing power of the poor and economic growth, warrants the need to continue to tighten.
The Central Bank had maintained a low interest rate regime since March 2019, when the apex bank reduced the MPR from 14% to 13%. Following that, the rate was reduced further in May 2020 to 12.5% and 11.5% in September 2020 in a bid to encourage more real sector spending amidst the covid-19 pandemic. However, the rising cost of energy across the world and the continuous scarcity of petrol in most Nigerian cities, which together have caused a significant surge in the prices of goods and services, have necessitated a hawkish move from the Central Bank.
What the bank is saying
The excerpt from the bank’s communique reads, “the MPC noted with concern the continued aggressive movement in inflation, even after the rate hike at its last meeting, and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.”
“The MPC noted that the current upsurge in price levels remains a primary concern to monetary policy as Members focused on the optimal policy approach required to address this development while protecting the fragile recovery.”
“Despite the apparent headwinds confronting the economy, the MPC noted that the banking system remained robust given the continued decline in NPLs below the prudential threshold and enjoined the Bank to sustain the trend by maintaining its vigorous surveillance to ensure [the] continued resilience of the banking industry.”
Why this matters to SMEs
The monetary policy interest rate, which determines the rate by which banks get loans from the CBN, is used to control the supply of money in the economy and can be raised to combat inflationary pressure. However, this hike in interest rate means that loan seekers will pay a higher interest rate to access credit, which could affect economic growth.
Small businesses and individuals who seek to access loans could be discouraged by higher interest rates, which could affect the level of business activities in the country. However, it should be noted that the hike in interest rate is a necessary tool to curb the rising prices of commodities and services in the country as opined by the apex bank.