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CBN raised policy rate to tackle inflation amid slowing growth

The Nigerian economy has been grappling with several challenges, ranging from Covid-19 lock down to economic recession and now to escalating inflation. Between April 2020 and April 2022, headline inflation has risen by almost 450bps from 12.34% to 16.82%. The persistent inflationary pressure in recent time fueled by elevated energy costs and food prices supported by the ongoing Russian-Ukraine war has been globalized. Hence, both advanced and developing economies commenced monetary tightening regime in a bid to rein in inflation.

In a move that exceeded the expectations of market participants, the CBN commenced a tightening cycle after maintaining a status quo tradition for over 20 months. For the first time in 70 months, the CBN raised the policy rate by 150bps from 11.5%p.a to 13%p.a.  While announcing its position on May 24, the CBN governor emphasized that its decision was a demonstration of its commitment to fight inflation and maintain price stability. But Nigeria is not alone in this move. The rate hike momentum cuts across most of Nigeria’s trading partners including India, the US, the UK and several emerging markets and developing economies (EMDEs) who all raised their policy rates in recent time. As monetary tightening spree takes the center stage in a period of global stagnation, the intractable question is,” will the rate hike be growth-enhancing or growth-inhibiting?”

Moreso, the economic performance report released by NBS showed that the Nigerian economy recorded a positive but slowing growth rate of 3.11% in Q1’22 which represents 0.87% decline compared to the performance of the economy in Q4’2021. On a quarter-on-quarter basis, real GDP contracted by 14.66% in Q1’22, highlighting the impact of doubling of the price of diesel, PMS scarcity that hit the economy in February, as well as escalating production and logistics costs. The slowdown could largely be attributed to economic shocks stemming from the backlash of the sanctions imposed on Russia for invading Ukraine as well as supply-chain disruptions which have buoyed this spike in commodity and energy prices. The slowdown is also compounded by seasonality effects.

In this edition of the FDC Monthly publication, the FDC Think-Tank analyzes major economic events in Nigeria amidst other interesting reads.

Enjoy your read!