The Monetary Policy Committee (MPC) of the Central Bank of Nigeria has raised the lending rate, otherwise known as the monetary policy rate (MPR), by 100 basis points to 17.5%. At its January 2023 meeting held on Monday and Tuesday January 23 and 24 respectively, the regulator stated that the overall outlook for both the domestic and global economies is still uncertain due to uncertainties such lingering effects of the Russia-Ukraine crisis, increased inflationary pressure in some economies, and a slowdown in economic activity in China amid COVID-19 resurgences. Increasing threats of a global debt crisis and tighter external financial conditions due to the continuation of monetary policy normalization are two more.
Summary of the MPC Decisions
• Raise MPR by 100bps to 17.5%
• Retain the asymmetric corridor of the MPR at +100 / -700 basis points.
• Retain CRR at 32.5%.
• Retain liquidity ratio at 30%.
Regarding the domestic economy, the MPC remarked that the evidence and projections for the key macroeconomic indicators point to continued but moderate growth in 2023. The committee claims that the key sources of shocks to the Nigerian economy continue to be insecurity, PMS scarcity, high prices for alternative energy sources (diesel and aviation fuel), spending on the general election in 2023, rising debt servicing costs, and deteriorating fiscal balance.
The committee highlighted that better-than-expected company earnings and increased investor confidence in the market were two factors contributing to the equities market’s improvement during the review period. The committee also pointed out that the decrease in external reserves seen over the period is a result of both increased foreign exchange demand and delayed reserve accretion.
The NPL ratio in the banking system continued to improve, falling from 4.9% in November to 4.2% in December, as seen by MPC. The committee concluded that in order to maintain NPL below its prudential threshold of 5%, a strict prudential framework was necessary. Additionally, the capital adequacy ratio remained at 13.4%, within the regulatory limit of 10 -15%, but the liquidity ratio, at 44.1%, was beyond its prudential limit of 30%.
The MPC warned that relaxation could cause inflation to rise more quickly and undermine the benefits from earlier rate hikes. A hold posture was also not taken into account because it would indicate a meager effort on the part of the CBN to control inflation. Despite the fact that year-over-year inflation fell in December of 22 according to the committee, they still felt that the economy was still at risk of experiencing higher inflation that would have a negative impact on living standards.
A move toward tightening would show confidence in the ability of the central bank’s monetary policy to reduce inflation, enhance the stability of the financial system, reduce the negative real interest rate margin, and control exchange rate swings. Click here to read the complete report. SOURCE: Coronation Merchant Bank