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You are here:Home>>Strategic Research & Analysis>>CBN raised interest rate to 7.5%,an aggressive monetary tightening
Thursday, 24 March 2011 01:26

CBN raised interest rate to 7.5%,an aggressive monetary tightening

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Naira currency Naira currency CBN

Afripol subscribed to gradual interest rate raise for market's stabilization

For the second time Central Bank of Nigeria (CBN) raised the benchmark interest rate to 7.5 percent from the previously 6.5 percent. The one point ascension of the interest rate was part of the aggressive monetary policy tightening by the apex bank to hold back the inflation and soldified the gain made that was buttressed by the receding inflationary trend. The February rate of inflation has receded to an annual 11.1 percent, although a point behind the targeted 10 percent but a good development.

Central Bank of Nigeria Communiqué No. 75 of the Monetary Policy Committee Meeting, March 21-22, 2011 was signed by Governor Sanusi stated that the, "Members of the Committee voted unanimously for further tightening of monetary policy because of heightened risk of inflation. The Members specifically pointed out the rising international food and energy prices, the impact of import costs on domestic prices, the challenges that fiscal stance posed to the external value of the Naira and the likely front-loading of public expenditure in the election period. Against this background, the following decisions were taken:

1. A majority of 9 to 3 Members voted for an increase in MPR by 100 basis points from 6.50 per cent to 7.50 per cent. The 3 Members voted for a 50 basis points increase;

2. A unanimous decision to,

a. Retain the symmetric corridor of +/- 200 basis points;

b. Retain the current CRR of 2.0 per cent and the liquidity ratio of 30.0

per cent; and

c. Extend the CBN guarantee on interbank transactions and

guarantee of foreign credit lines by three months from June 30, 2011

to September 30, 2011."

The aggressive raise of the benchmark interest rate may actually get the task accomplished by quick reduction of inflation. But in long term it may defeat the primary purpose by reverting back to credit crunch at the monetary base. It is logical to gradually hike the interest rate methodically as the market is examined and stability re-enhanced and re-enforced.

The 7.5 percent raised maybe too aggressive, Afripol subscribed to rather a gradual ascend at half point addition at 7 percent. The point is not lost at what monetary policy committee is trying to accomplish in steming down inflation and consolidating the gain made so far. To mop up the liqudity in the market so fast may not bring the relative balance and stability needed in the market. The gradual process of drying of the liquidity at monetary base does not have a shock effect on the market. Therefore raising the benchmark interest rate to 7 percent rather than 7.5 percent would have been better.

 

Last modified on Sunday, 27 March 2011 16:39

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