Nigeria: Central Bank delivers strong hike in February
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) met on 26–27 February for the first time since July 2023. In the meantime, Olayemi Cardoso became governor of the Bank in September, and the CBN skipped two meetings scheduled for September and November.
At its latest meeting, the Bank increased the key rate to 22.75% from 18.75%. The decision surprised markets on the upside; analysts were expecting a smaller hike. Meanwhile, the Bank increased the cash reserve ratio to 45.00% from 32.50% and widened the interest rate corridor around the key rate to +100/-700 basis points from +100/-300 basis points.
The Bank opted to hike to curb rampant inflation: In January, inflation rose to 29.9%, its highest level since May 1996. Moreover, the CBN also mentioned exchange rate pressures as a driver of its decision; the naira is currently around 70% weaker year on year against the USD, after the Bank implemented a variety of reforms in the exchange rate market in recent months. Meanwhile, as Governor Cardoso announced on 24 November, the Bank mentioned that it is transitioning to an inflation targeting framework but did not refer to an explicit target.
The communiqué did not include any explicit forward guidance. That said, the CBN forecasts inflation to rise further in the near term and expects most central banks across the globe to retain elevated interest rates in the short-to-medium term. Against this backdrop, the Bank stated that it would “continue to monitor developments in the global and domestic economies to ensure that inflationary and exchange rate pressures moderate in the near term”. Our panelists expect the Bank to hike rates further in upcoming meetings.
The next meeting is scheduled for 25–26 March.
Analysts at Fitch solutions commented on the outlook:
“We believe that the Central Bank of Nigeria (CBN) will raise the policy rate to 28.00% by end-2024 […] Persistent weakness in the foreign exchange market will encourage the CBN to tighten monetary policy further […]. While we do not think that higher interest rates will directly lead to an increase in capital inflows—given the high-risk perception investors have regarding Nigeria—the CBN will still seek to tighten monetary policy to signal a commitment to inflation targeting and a pivot towards monetary orthodoxy.”
Meanwhile, analysts at the EIU said:
“Although rate rises in 2024 are possible, we do not expect real short-term interest rates to enter positive territory, which would boost foreign-exchange inflows. An increase in unemployment at a time when hardship is already acute will be resisted by the government, whose popularity has plummeted. We expect foreign borrowing to be the preferred option of stabilising the currency.”