New year, new rate
The CBN entered the new year with its hawkish stance from 2022. The bank raised interest rates by 100 basis points (bps) in its first monetary policy meeting of the year. This is after a cumulative increase of 500bps last year between April and November 2022.
Based on the CBN’s communication, the target of hikes has been to rein in inflation, this is complemented by the currency redesign which was targeted at the informal sector.
The interest rate increase comes as December inflation figures show a slowdown in the rate of inflation for the first time in 11 months and the deadline for the circulation of old notes (January 31) draw near.
So what?
We previously stated that the slowdown in the inflation rate might encourage the apex bank to reconsider future rate hikes. It seems they were not convinced by the figure and continued their stance. This, however, is consistent with global practice, a series of reductions in inflation rate will be needed for the CBN to assess if its MPR rate hikes have been effective or if the fall in inflation is a one-off incident.
The use of a combination of orthodox (interest rate manipulation) and unorthodox (currency redesign) methods is a testament to the banks' commitment to tackling inflation. However, at the risk of sounding like a broken record, we are of the opinion that the issues that need to be addressed to bring down inflation are structural. Nevertheless, the bank should be commended for its efforts.