CBN raises interest rate as Tinubu seeks lower borrowing costs

The Central Bank of Nigeria raised its key lending rate by 25 basis points to 18.75% on Tuesday in a bid to tame a nearly two decades-high inflation.

With consumer prices in June at the highest level in 18 years, and the removal of petrol subsidy and the naira devaluation expected to make it worse, analysts expected a higher interest rate increase from the CBN.

Seventeen economists surveyed by Bloomberg expected between a hike between 50 basis points and 200 basis points. The bank said its monetary policy committee voted differently.

Of its 11 members, four voted for a 25 basis-point hike, two favoured a 50 basis-point increase and the rest preferred a hold, said acting Governor Folashodun Shonubi, who presided over his first MPC meeting as interim governor more than a month after taking over from Godwin Emefiele.

Earlier on Tuesday, Mr Emefiele appeared before a federal judge in Lagos on charges of illegally possessing firearms.

Under Mr Emefiele, the monetary policy committee increased rates by 725 basis points since May 2022 to respond to inflation.

Mr Shonubi said members of the committee considered only holding or increasing the rates, and most went with the later.

“The option to continue to hike the policy rates, albeit moderately, also presented a strong alternative. This is premised on the expected liquidity injection into the economy from the recent policy developments and the likely impact on inflation,” he said at a press briefing.

– Lock and unlock

The policy rate announcement was seen as the first test of the CBN’s independence as a monetary authority after President Bola Tinubu said he wanted the costs of borrowing reduced to boost economic growth.

Analysts say reducing the cost of borrowing, which is the interest rate, would push inflation higher. The CBN’s decision is seen as a balancing act that responds to inflation by reducing money supply moderately while also trying to cut borrowing costs.

For the first time since September 2020, the central bank changed its asymmetric corridor from +100/-700 basis points to +100/-300 around the interest rate.

That means banks will borrow from the central bank at 18.75% plus 100 basis points, which is 19.75%. They will get 18.75% minus 300 basis points, which 15.75%, on money they keep with the CBN. The previous corridor of -700 would have fetched them 11.75%.

Also, just over a week ago, the CBN slashed the mandatory cash reserve requirement for merchant banks – banks that lend exclusively to companies – in a bid to boost the availability of credit and ease borrowing costs.

It reduced the cash reserve ratio — the amount lenders have to keep with the central bank — to 10% from 32.5% “to boost the banks’ ability to avail increased infrastructure, real sector and other long-term financing,” the bank said. The measure takes effect August 1.

Six merchant banks are licensed to operate in Nigeria, including RMB Nigeria Ltd., FBNQuest Merchant Bank Ltd. and Coronation Merchant Bank Ltd.