In a bid to address soaring inflation and stabilize its currency, Nigeria’s central bank announced a significant hike in interest rates during its first policy meeting since July. Governor Olayemi Cardoso and the monetary policy committee colleagues raised the benchmark rate by a substantial 400 basis points to 22.75%, surpassing economists’ median estimate.
In addition to the rate hike, the central bank implemented other liquidity measures, including an increase in the cash reserve ratio to 45% from 32.5% and adjustments in funding and lending bands for banks. Going forward, the borrowing cost for lenders will be set 100 basis points above the monetary policy rate, while the return on deposits will be 700 basis points below the benchmark.
Cardoso highlighted the decision was driven by concerns over rising inflation levels and exchange rate pressures. He emphasized the committee’s commitment to curbing inflation, noting the risks tilted towards further increases.
Following the announcement, the yield on Nigeria’s dollar bonds due 2029 saw little change, indicating market stabilization.
Ayodeji Dawodu, director of fixed income at Banctrust Investment Bank Ltd., described the rate hike as aggressive but noted its potential to boost confidence among both domestic and foreign investors.
This move marks an unprecedented increase of 1,025 basis points since the tightening campaign began in May 2022. The aim is to alleviate price pressures, which reached nearly three-decade highs last month, and support the Nigerian naira, which has experienced a significant depreciation against the dollar, losing approximately 70% of its value.
Cardoso reiterated the MPC’s belief in the undervaluation of the naira and discussed ongoing reforms in the foreign exchange market, expecting positive outcomes in the short to medium term. These reforms include unification of the exchange market and the promotion of a transparent market system.
However, the policy changes have faced mixed reactions domestically, with protests erupting in various provinces due to the impact on living costs. President Bola Tinubu’s economic reforms, including currency controls easing and fuel subsidy removal, have garnered international investor support but sparked local discontent.
Cardoso acknowledged the trade-off between stimulating output growth and controlling inflation, emphasizing the necessity of maintaining low and stable inflation for sustained economic expansion. Despite the challenges, Nigeria’s economy is projected to grow by 3.38% in 2024, an improvement from the previous year.
