CBN hikes interest rate to 27.25% amid inflation control, growth debate

The Central Bank of Nigeria (CBN) raised its benchmark lending rate to 27.25 per cent from 26.75 per cent on Tuesday, in a continued effort to control inflation.

CBN Governor Olayemi Cardoso announced the decision after a two-day Monetary Policy Committee (MPC) meeting in Abuja, stating that the move is aimed at ensuring a sustained decline in inflation levels.

“After reviewing risks to price stability and output growth, the committee decided to tighten policy further to preserve the gains in moderating inflationary pressures,” said Cardoso.

The CBN also made several other key adjustments, including raising the Cash Reserve Ratio (CRR) for commercial banks to 50% and retaining the liquidity ratio at 30%.

Experts have expressed mixed reactions to the rate hike, with some supporting the CBN’s strategy while others caution about its impact on the broader economy.

Dr. Amina Oladimeji, an economist at the University of Lagos, welcomed the move. “With headline inflation showing signs of easing, the CBN’s decision to stay the course is commendable. This rate increase will help reinforce price stability and protect the naira from further depreciation,” she said.

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However, Bismarck Rewane, CEO of Financial Derivatives Company, warned that higher interest rates could hurt business growth. “Raising the benchmark rate to this level might stifle credit access for small and medium enterprises (SMEs). While inflation control is crucial, growth must not be sacrificed, especially for sectors that are already facing rising input costs,” Rewane remarked.

The CBN’s decision comes amid a gradual slowdown in inflation. The National Bureau of Statistics (NBS) reported that Nigeria’s inflation rate fell to 32.15% in August 2024, down from 33.40% in July.

This marked the second consecutive month of easing inflation, although core inflation, driven by rising energy costs, remains a concern.

Governor Cardoso noted that the exchange rate had stabilized due to strict monetary policy but acknowledged that inflationary pressures persist, particularly from global energy prices. The MPC emphasized the need for closer cooperation with fiscal authorities to tackle these structural inflation challenges.

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Dr. Adewale Odusola, a financial analyst at ARM Investment Managers, commented on the exchange rate dynamics, stating, “While the naira has shown resilience, high energy prices continue to pressure core inflation. The CBN’s tight monetary policy has helped stabilize the currency, but broader economic reforms are needed to address structural issues.”

The CBN’s commitment to monitoring liquidity levels and coordinating with fiscal authorities to avoid excessive government spending was also highlighted as crucial to maintaining the stability of Nigeria’s banking sector.

As the CBN tightens its policy further, experts warn of potential short-term economic slowdowns, particularly for businesses dependent on credit. However, the central bank remains firm in its approach, aiming to maintain price stability while managing the risks to growth.

The MPC’s ongoing focus on inflation and exchange rate stability reflects the challenges of balancing monetary tightening with the need to support economic recovery, especially in the face of external pressures like energy price fluctuations.