On the 25th and 26th of March 2024,
the Monetary Policy Committee (MPC) held its 294th MPC meeting. The Committee
further tightened the Monetary Policy Rate (MPR) by 200bps to 24.75%.
This represents an increase of N43.07
billion or 1.18 per cent Month-on-Month (MoM) from N3.65 trillion reported in
January 2024, and N443.38 billion or 13.64 per cent Year-on-Year (YoY) from
N3.25 trillion reported February 2023.
This move reflects the Central Bank
of Nigeria's (CBN) efforts to curb inflation and attract Foreign Portfolio
Investment (FPI) inflows. In addition to raising the MPR, the Committee also
deployed other monetary policy tools.
The Monetary Policy Rate (MPR) is the
key interest rate set by a country's central bank, such as the Central Bank of
Nigeria's (CBN). It influences other interest rates in the economy and is used
to control inflation, stimulate economic growth, or stabilize the currency.
When the central bank raises the MPR, borrowing becomes more expensive, which
can help control inflation but may also slow down economic growth. Conversely,
lowering the MPR can stimulate economic activity but may lead to higher
inflation.
In summary, the Committee decided to:
Hike MPR by 200bps to 24.75%
Adjust Asymmetric Corridor to
+100/-300 basis points around the MPR.
Maintain Cash Reserve Ratio (CRR) of
Commercial banks at 45%
Raise the CRR of Merchant banks from
10% to 14%.
Sustain Liquidity Ratio at 30%
An asymmetric corridor refers to a
situation where the central bank sets different interest rates for the lending
and deposit facilities, creating a corridor within which the interbank interest
rates fluctuate. In this setup, one rate serves as the floor (the deposit rate)
and another as the ceiling (the lending rate).
This approach allows the central bank
to influence short-term interest rates and maintain control over monetary
policy, typically aiming to keep interbank rates close to the policy rate (such
as the Monetary Policy Rate) within the corridor.
It's called "asymmetric" because the
lending and deposit rates are not necessarily equal or symmetrical around the
policy rate. This mechanism helps central banks manage liquidity in the banking
system and achieve their monetary policy objectives.
The Cash Reserve Ratio (CRR) is the
portion of deposits that banks are required to maintain with the central bank
in the form of cash reserves, rather than being lent out or invested. It's one
of the primary tools used by central banks to control the money supply and
influence economic activity.
By adjusting the CRR, the central
bank can either increase or decrease the amount of money that banks can lend
out, thus impacting credit availability and inflation.
When the central bank raises the CRR,
banks have less money to lend, which can help control inflation but may also
slow down economic growth. Conversely, lowering the CRR frees up more funds for
lending, stimulating economic activity but potentially leading to higher
inflation.
The Liquidity Ratio, also known as
the Liquidity Coverage Ratio (LCR), is a regulatory requirement that measures a
bank's ability to meet its short-term obligations with high-quality liquid
assets. It is designed to ensure that banks have sufficient liquid assets to
withstand short-term liquidity disruptions.
The ratio compares a bank's
high-quality liquid assets (such as cash, government securities, and central
bank reserves) to its total net cash outflows over a specified period,
typically 30 days.
By maintaining a sufficient liquidity
ratio, banks can mitigate the risk of liquidity crises and financial
instability. Regulatory authorities set minimum liquidity ratio requirements to
ensure the stability of the banking system and protect depositors' funds.
Banks that fail to meet these
requirements may face penalties or restrictions on their operations.
The hike in Nigeria’s Monetary Policy
Rate, also known as interest rate, from 22.75 per cent to 24.75 per cent by the
Central Bank of Nigeria will further accelerate the country’s inflation and
lead to massive job cuts across the country, private sector operators stated on
Tuesday.
Amid the aggressive tightening stance
of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN),
currency in circulation reached historic high of N3.69 trillion February 2024.