The Central Bank of Nigeria (CBN) has increased the Monetary Policy Rate (MPR) from 26.75% to 27.25%, marking a 50 basis points hike. The MPR serves as the benchmark for interest rates in Nigeria, and the adjustment is aimed at further curbing the country’s persistently high inflation. The decision was announced by CBN Governor Olayemi Cardoso on Tuesday after the Monetary Policy Committee’s (MPC) 297th meeting in Abuja.

Cardoso explained that the rate hike is part of the CBN’s ongoing efforts to control inflationary pressures, even as Nigeria’s inflation rate slightly eased. According to data from the National Bureau of Statistics (NBS), the inflation rate fell to 32.15% in August 2024, marking the second consecutive decline this year. Despite this, inflation remains a key concern for policymakers.

In addition to the MPR increase, the MPC retained the asymmetric corridor at +500 and -100 basis points around the MPR. The cash reserve ratio (CRR), the amount of funds banks must hold in reserve, was also raised from 45% to 50%, while the liquidity ratio was kept unchanged at 30%.

Cardoso noted that the committee acknowledged improvements in exchange rate stability, attributing this to the bank’s tight monetary policies. He stated that this stability would enhance confidence among economic actors, facilitating better long-term planning.

However, the governor cautioned that much more needs to be done to achieve the CBN’s objective of price stability. While headline inflation has moderated due to easing food prices, core inflation—driven by rising energy costs—remains stubbornly high. The MPC stressed the importance of continued collaboration with fiscal authorities to tackle the upward pressure on energy prices, a key driver of inflation.

Analysis of the Rate Hike

The CBN’s decision to raise the interest rate to 27.25% underscores its determination to rein in inflation, which has remained persistently high despite recent declines. The rate hike, alongside the increase in the cash reserve ratio to 50%, signals a more aggressive tightening stance aimed at reducing excess liquidity in the financial system. This approach is expected to make borrowing more expensive, thereby dampening consumer demand and reducing inflationary pressures.

However, the continued high levels of core inflation, particularly driven by energy costs, suggest that monetary policy alone may not be sufficient to address Nigeria’s inflation problem. The central bank’s tight monetary policies are having some impact, as evidenced by the improved exchange rate stability, but the inflationary impact of rising energy prices remains a critical challenge.

Furthermore, the CBN’s emphasis on closer collaboration with fiscal authorities is a recognition that structural issues—such as fuel and electricity costs—are major contributors to inflation. Without addressing these root causes, rate hikes may only have a limited effect in bringing inflation under control.

In the short term, the rate hike will likely slow economic activity as businesses and individuals face higher borrowing costs. This could dampen investment and consumption, potentially constraining growth. However, if inflation remains unchecked, it could further erode purchasing power and destabilize the economy. Thus, the CBN’s move represents a delicate balancing act: curbing inflation without stifling economic recovery.

Going forward, the effectiveness of this policy will depend heavily on how well it is complemented by fiscal measures that address Nigeria’s structural inflation drivers, particularly in the energy sector.