On the 25th and 26th of March 2024, the Monetary Policy Committee (MPC) held its 294th MPC meeting. The Committee further tightened the Monetary Policy Rate (MPR) by 200bps to 24.75%.

This represents an increase of N43.07 billion or 1.18 per cent Month-on-Month (MoM) from N3.65 trillion reported in January 2024, and N443.38 billion or 13.64 per cent Year-on-Year (YoY) from N3.25 trillion reported February 2023.

This move reflects the Central Bank of Nigeria's (CBN) efforts to curb inflation and attract Foreign Portfolio Investment (FPI) inflows. In addition to raising the MPR, the Committee also deployed other monetary policy tools.

The Monetary Policy Rate (MPR) is the key interest rate set by a country's central bank, such as the Central Bank of Nigeria's (CBN). It influences other interest rates in the economy and is used to control inflation, stimulate economic growth, or stabilize the currency. When the central bank raises the MPR, borrowing becomes more expensive, which can help control inflation but may also slow down economic growth. Conversely, lowering the MPR can stimulate economic activity but may lead to higher inflation.

In summary, the Committee decided to:

📝Hike MPR by 200bps to 24.75%

📝Adjust Asymmetric Corridor to +100/-300 basis points around the MPR.

📝Maintain Cash Reserve Ratio (CRR) of Commercial banks at 45%

📝Raise the CRR of Merchant banks from 10% to 14%.

📝Sustain Liquidity Ratio at 30%

 

An asymmetric corridor refers to a situation where the central bank sets different interest rates for the lending and deposit facilities, creating a corridor within which the interbank interest rates fluctuate. In this setup, one rate serves as the floor (the deposit rate) and another as the ceiling (the lending rate).

This approach allows the central bank to influence short-term interest rates and maintain control over monetary policy, typically aiming to keep interbank rates close to the policy rate (such as the Monetary Policy Rate) within the corridor.

 It's called "asymmetric" because the lending and deposit rates are not necessarily equal or symmetrical around the policy rate. This mechanism helps central banks manage liquidity in the banking system and achieve their monetary policy objectives.

The Cash Reserve Ratio (CRR) is the portion of deposits that banks are required to maintain with the central bank in the form of cash reserves, rather than being lent out or invested. It's one of the primary tools used by central banks to control the money supply and influence economic activity.

By adjusting the CRR, the central bank can either increase or decrease the amount of money that banks can lend out, thus impacting credit availability and inflation.

When the central bank raises the CRR, banks have less money to lend, which can help control inflation but may also slow down economic growth. Conversely, lowering the CRR frees up more funds for lending, stimulating economic activity but potentially leading to higher inflation.

The Liquidity Ratio, also known as the Liquidity Coverage Ratio (LCR), is a regulatory requirement that measures a bank's ability to meet its short-term obligations with high-quality liquid assets. It is designed to ensure that banks have sufficient liquid assets to withstand short-term liquidity disruptions.

The ratio compares a bank's high-quality liquid assets (such as cash, government securities, and central bank reserves) to its total net cash outflows over a specified period, typically 30 days.

 

By maintaining a sufficient liquidity ratio, banks can mitigate the risk of liquidity crises and financial instability. Regulatory authorities set minimum liquidity ratio requirements to ensure the stability of the banking system and protect depositors' funds.

Banks that fail to meet these requirements may face penalties or restrictions on their operations.

 

The hike in Nigeria’s Monetary Policy Rate, also known as interest rate, from 22.75 per cent to 24.75 per cent by the Central Bank of Nigeria will further accelerate the country’s inflation and lead to massive job cuts across the country, private sector operators stated on Tuesday.

Amid the aggressive tightening stance of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), currency in circulation reached historic high of N3.69 trillion February 2024.