Nigeria: Central Bank of Nigeria hikes key policy rate to curb surging inflation
July 26, 2016
At its 25–26 July monetary policy meeting, the members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to hike the monetary policy rate from 12.00% to a record high of 14.00%. The move came against a backdrop of surging inflation, a collapsing currency and shrinking output in Q1. Particularly, the CBN’s 200-basis-point hike aims to bring surging inflation under control as the drastic depreciation of the naira following June’s removal of its peg to the U.S. dollar heightened inflationary pressures. However, the MPC’s opinion was divided, with only five of its eight members voting in favor of the rate hike and the remaining three against it, as higher interest rates risk further restraining activity in the ailing economy. Meanwhile, the Committee left the asymmetric corridor of plus 200 and minus 500 basis points around the key rate unchanged. Finally, CBN members decided to keep the Cash Reserve Requirement (CRR) at 22.50% and the Liquidity Ratio (LR) at 30.00%.
As for the domestic economy, the CBN highlighted that in Q1 Nigeria’s GDP contracted for the first time in many years, dragged down by manifold problems such as energy shortages, elevated electricity tariffs, price increases, a severe foreign currency shortage and weak demand. While a few of these factors eased in Q2, the Central Bank expects economic activity to have remained lackluster in that period as attacks on oil facilities reduced output and fiscal spending fell short of target. Regarding the evolution of inflation, the MPC stated that inflation had reached a multi-year high of 16.5% in June, reflecting both “structural factors”—including elevated costs for electricity, transport and low industrial activity—as well as the pass-through effect of the depreciating naira. The next monetary policy meeting is scheduled for 19–20 September.