As part of its monetary policy measures, the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) has chosen to raise the Monetary Policy Rate (MPR) by 50 basis points.
This result in a new rate of 27.25%, up from its previous rate of 26.75%.
Yemi Cardoso, who holds the position of Governor of the CBN, revealed this information on Tuesday in Abuja while reading the communiqué from the 297th meeting of the MPC.
Cardoso made the announcement that the committee has not only decided to raise the Cash Reserved Ratio (CRR) by 50 basis points for Deposit Money Banks (DMBs), but also to increase it from 45% to 50%.
Additionally, the CRR for merchant banks will be raised from 14% to 16%.
Despite this, the committee made the decision to keep the Liquidity Ratio unchanged at 30%.
They also decided to maintain the Asymmetric Corridor at +500/-100 basis points around the MPR.
You may wonder what does this means to the economy.
The act of increasing the MPR results in making borrowing more expensive, and this can be an effective measure to control inflation.
If the central bank hikes the interest rates, it becomes more expensive to borrow money.
This means people are less likely to buy things they usually finance, like houses or cars, and businesses are less likely to invest in new equipment, software, or buildings.
This reduced level of economic activity would reduce the price of goods and lower inflation.
An appreciation of the currency is a common outcome when interest rates are elevated, as foreign investors actively pursue higher returns and subsequently drive up their demand for the currency.
Though, it is not best for this to go on for a long time. It needs to be adjusted back.