CBN Raises interest rate to 10.25%

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In a bid to reduce the pressure on the economy occasioned by distribution of part of the excess crude revenue and the 2008 budget, the Central Bank of Nigeria (CBN) yesterday raised its benchmark interest rate (Monetary Policy Rate) by 25 basis point, from 10 to 10.25 per cent, citing rising inflationary pressures.

 

The MPR is the interest rate at which the banking watchdog lends to commercial banks. The last time the apex bank raised the MPR was last April, when it moved it up from 9.5 to 10 per cent after raising it from 9 to 9.5 per cent last December.

 

CBN Governor, Professor Chukwuma Soludo, who announced the new MPR shortly after the Monetary Policy Committee (MPC) meeting in Abuja yesterday, warned that the federal government budget as approved  by the National Assembly and the distribution of part of the excess crude oil proceeds would lead to high liquidity injection in the next two quarters of the year.

 

By raising its rates, the apex bank, which is taking a preemptive move to cage inflation, is encouraging people to save by adding additional interest to their savings. At the same time it is discouraging people from spending because of the perceived or anticipated excess funds in the economy.

 

Justifying the MPC’s move, Soludo said it was to mitigate the effect of rising inflation rate, which he said increased from 7. 8 per cent last March to 8.2 per cent a month later.  The inflation   has maintained an upward streak in the last few months and could increase further giving the prevailing food crisis. It was 6.6 per cent last December.

 

The CBN Governor also raised the Cash Reserve Ratio (CRR) by 100 basis point from 3 per cent to 4 per cent. The CRR is the proportion of banks total deposits held in cash balance with the CBN.

 

He also put the figure of the nation’s external reserves, at $59.16 billion as at May 28, 2008. This, he said, could finance 27 months of current foreign exchange disbursements.

 Soludo  said the committee  had observed that the monetary policy had  to be proactive  and as such  had to ensure that negative factors  affecting price stability  and real activity were taken care of.

 

“The policy has to ensure that concerns about price stability and real activity levels are recognised and actions taken to address them.  In view of the sharp growth of credit to private sector by 96 per cent and M2 by 62 per cent on a year-on-year basis by March 2008, and as final expansion is all time high, threats of resurgence of inflation are very high.

 

“In addition, there are threats of imported inflation owing to the global rise in prices,” he said.

 

He attributed the “elevated inflation rate” mainly to the increase of 13.1 per cent in food prices, which has a large weight of 63.76 per cent on the overall index.


The CBN Governor said: “The downward risk to inflation would arise if demand pressure is exerted by large fiscal injection and private expenditures beyond what the supply can accommodate.”

 

The committee, he said, had noted: “8.2 per cent inflationary pressure as measured by the movements in the year-on-year consumer price index intensified in April 2008 from a lower 7.8 per cent in March and 6.6 per cent in December 2007.”

 

Envisaging  high liquidity profile in the next two quarters, Soludo said a Technical Committee would be set up to work out other intervention securities that the CBN would issue to further strengthen the effectiveness of the liquidity management, while continuing with the use of instruments  including  Open Market Operation (OMO).

 

He said that the MPC had noted that “the actual and potential impact on liquidity of recent fiscal disbursements from the excess crude oil account and other disbursements scheduled for June 2008 would be considerable.”

 

The CBN governor stated that provision data had indicated that M2 grew by 34.8 per cent in the first three months of the  year,  and an increase of 62.2 per cent year-on-year by the end of March 2008.

 

The growth, he said, was “driven by increases in net foreign assets of the banking system as well as credit to the private sector.”

 

The committee, he said,  had  envisioned that liquidity surge would continue to be intense in the months ahead and therefore such required appropriate actions to align the demand for and supply of reserves.

 

The MPC  comprises the CBN Governor, his four deputies, his Directors of Research; Foreign Operations; Banking Operations; Banking Supervision; Trade and Exchange; Other Financial Institutions; Governors Office; Special Adviser to the Governor; a member of the CBN board and the Permanent Secretary of the Ministry of Finance. - Thisday

 

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