Expert Speaks on CBN’s Decision To Raise Interest Rate by 50 Basis Points, Asks Important Questions

• The Central Bank of Nigeria Monetary Policy Committee has once again increased the benchmark interest rate.
• The new interest rate means that obtaining loans from banks and servicing existing credit will become more expensive
• Nigerian economist Muda Yusuf, who is also the CEO of the CPPE, shared with Legit.ng the impact of CBN's new rate."

Legit.ng journalist Dave Ibemere has over a decade of business journalism experience with in-depth knowledge of the Nigerian economy, stocks, and general market trends.

Uche Uwaleke a financial expert and Director of the Institute of Capital Market Studies (ICMS), Nasarawa State University said the Central Bank of Nigeria decision to increase monetary policy rate (MPR), which benchmarks interest rates will affects banks borrowing costs.

Speaking to Legit.ng, he noted that why he anticipated the increase, CBN's decision will tighten liquidity in the banking system further and escalate the cost of credit, which could negatively impact economic output and the equities market.

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CBN raises interest rate

Legit.ng had earlier reported that the CBN raised interest rate from 26.25% to 26.75% as it bids to tackle rising inflation.

Olayemi Cardoso, governor of the apex bank, announced the rate adjustment at the end of the committee’s 296th meeting in Abuja, on Tuesday, July 23, 2024, Punch reports.

Other decisions carried out in the meeting include setting the asymmetric corridor around the MPR from +100 to -300 to +500 to -100 basis points and also retaining the Cash Reserve Ratio (CRR) of deposit money banks at 45% and merchant banks at 14% and retained the Liquidity Ratio at 30%.

Expert speaks on new CBN interest rate

Speaking on the changes, Uwaleke was not happy that the CBN was not open on the reasons behind some of its decisions like why it chose to mask the tightening measures within the asymmetric corridor rather than directly reflecting them in the MPR.

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He said:

"Having raised the rate by 750 basis points between February and May this year, I had predicted that they would make a minimum adjustment of 50 basis points or a maximum of 100 basis points in July.

"I am pleased to note that they opted for the lower end of the range, which suggests that a complete halt is likely in their next scheduled meeting in September.

"However, the adjustment to the asymmetric corridor around the MPR is a major concern for me.

"The MPC communiqué did not provide any explanation for increasing the SLR from +100 to +500 and the SDR from -300 to -100.

"By implication, with an MPR of 26.75%, banks will now borrow from the CBN at 31.75% while they will be remunerated for their excess deposits at 25.75%. This will further squeeze liquidity from the banking system and increase the cost of credit, with adverse consequences on output and the equities market.

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"The MPC communiqué should have clarified why it was preferable to mask the tightening in the asymmetric corridor rather than reveal it in the MPR.

Additionally, the professor observed a lack of transparency in recent MPC communications, noting that unlike previous statements, recent communiqués have not disclosed how members voted.

"May I observe that, unlike previous MPC communiqués, recent ones are silent regarding how the members voted. This information is useful at this stage, even before their personal statements are published.

"I submit that, given the major non-monetary drivers of Nigeria’s current elevated inflation, the fiscal side holds the key."

CBN sells 20,000 dollars each to BDCs

Legit.ng earlier reported that the Central Bank of Nigeria (CBN) has conducted another round of dollar sales to licensed Bureau De Change (BDC) operators.

The move, according to the CBN, is to ensure liquidity in the retail market demand for eligible invisible transactions.

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According to a new circular released on Thursday, July 18, the apex bank is ready to sell $20,000 to licensed BDC operators at N1,450 per US dollar.

Source: Legit.ng