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Wed, Jul 26, 2023 6:45 AM

CBN Increases Benchmark Interest Rate to 18.75%, Signals Convergence of Exchange Rates

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CBN Increases Benchmark Interest Rate to 18.75%, Signals Convergence of Exchange Rates
The Central Bank of Nigeria (CBN) has announced an increase in the benchmark interest rate to 18.75%, the highest in 22 years, as a response to rising inflation. While the hike is not an attempt to unify exchange rates, it signals a convergence of rates in the forex market. The CBN aims to boost transparency, attract investments, and stabilize the economy amid global and domestic shocks. The replacement of old currency notes with new ones is part of the bank's strategy to maintain an optimal currency level.

Lagos - The Central Bank of Nigeria (CBN) has announced an increase in the benchmark interest rate, known as the Monetary Policy Rate (MPR), by 25 basis points to 18.75 percent. This hike represents the highest interest rate in 22 years and comes as a response to the persistent rise in inflation impacting the Nigerian economy.

During the 292nd meeting of the Monetary Policy Committee (MPC) in Abuja, CBN Acting Governor, Mr. Folashodun Shonubi, clarified that the goal is not to unify exchange rates but rather to achieve a convergence of rates in the forex market. The CBN aims to improve market efficiency and effectiveness, which will take time but result in a more stable and transparent market.

The MPC decision to increase interest rates was primarily driven by the surging inflation rate in the country. Rising food and core component costs of the Consumer Price Index (CPI) have put upward pressure on inflation, posing challenges to output growth and household income. The removal of subsidies, exchange rate liberalization, and the disbursement of palliatives are also expected to have pass-through effects on inflation, as pointed out by the committee members.

Addressing these concerns, the MPC called for decisive measures in liquidity management and urged both the monetary and fiscal authorities to collaborate in curbing inflationary pressure and reinforcing domestic investments to reduce unemployment and stimulate output growth. It also emphasized the need to attract investments, especially in non-oil sectors like auto manufacturing, aviation, and rail industries, to boost Nigeria's non-oil revenues.

Recognizing the measures implemented by the CBN to enhance foreign exchange liquidity, the MPC expressed confidence that recent foreign exchange market reforms would foster market transparency and encourage more foreign capital inflows. The committee urged the bank to leverage effective policies to attract remittances from the diaspora, thereby helping to moderate exchange rate pressures.

As part of its strategy to maintain an optimum currency level, the CBN is gradually withdrawing old N1,000, N500, and N200 notes from circulation. Shonubi clarified that there are no plans to withdraw the newly introduced notes, debunking speculation in that regard.

The replacement of old notes with new ones is an ongoing process to keep the currency level stable. It is important to note that the banks receive fresh notes from the CBN based on demand and that a gradual transition from old to new notes will occur over time.

Professor Uche Uwaleke of Nasarawa State University, reacting to the interest rate hike, highlighted that the modest increase of 25 basis points shows the limited capability of the CBN to tackle supply-side-induced inflation solely through the policy rate. The decision to raise rates while maintaining policy parameters reflects an attempt to strike a middle-of-the-road path.

Source of content: OOO News 2023-07-26 News

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