CBN raises Monetary Policy Rate (MPR) to 26.25% to address inflationary and exchange rate challenges

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) convened for its 295th meeting on May 20th and 21st, 2024, and decided to raise the Monetary Policy Rate (MPR) by 150 basis points, bringing it up to 26.25 percent from 24.75 percent. This adjustment was made in response to the committee’s aim to address inflationary and exchange rate challenges that have been affecting the economy.

Despite this change, the committee opted to maintain other monetary policy instruments unchanged: the Cash Reserve Ratio at 45 percent and the Liquidity Ratio at 30 percent. The MPC is optimistic that its firm monetary policy stance is starting to produce the desired outcomes.

However, the committee remains concerned about obstacles hindering its efforts, such as imported inflation, insecurity in agricultural areas, continuous rise in transportation costs, and poor road infrastructure. In 2024 alone, the MPR has been increased three times, totaling a 550 basis points increment.

While the hike in interest rates is anticipated to alleviate inflation and exchange rate pressures, it may also result in elevated borrowing expenses, potentially leading to decreased investments and spending, consequently slowing down economic growth in the short term and escalating unemployment rates.

Furthermore, with the sustained rise in interest rates, banks might face higher default rates as borrowers struggle to cope with increased loan costs. The government is urged to support the central bank’s initiatives by implementing comprehensive structural reforms to alleviate supply-side constraints. This includes prudent government expenditure, targeted fiscal incentives particularly in the agricultural sector, and reduced reliance on imports, among other measures.