Nigeria’s central bank hikes interest rate to 24.75% as it battles sky-high inflation, currency crisis

Nigeria’s central bank hikes interest rate to 24.75% as it battles sky-high inflation, currency crisis

A pedestrian in the Lagos Island district of Lagos, Nigeria, on Monday, November 14, 2022.

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Nigeria’s central bank raised its key interest rate by 200 basis points on Tuesday as Africa’s largest economy seeks to recover from a historic currency crisis and rising inflation.

The CBN announced that its key interest rate would be raised to 24.75% from 22.75%, marking the second consecutive hike following the 400 basis point increase in February.

According to Reuters, Governor Olayemi Cardoso told a news conference that policymakers were convinced they needed to tighten monetary policy further to contain runaway inflation.

David Omojomolo, Africa economist at Capital Economics, said the latest move was “further evidence that officials are fighting aggressively to address the inflation problem and restore its damaged credibility,” although it was smaller than the previous move.

“This could be a sign that some MPC members are concerned about the impact of tighter monetary policy on growth,” he suggested in a note on Tuesday.

“Still, the fact that officials delivered a larger-than-expected rate hike suggests that fighting inflation, which stood at 31.7% year-on-year in February and is expected to rise further in the coming months, is a priority. “

Minutes of the central bank’s February meeting released last week showed policymakers making the case for aggressive interest rate hikes to curb soaring inflation, which was at an annual 31.7% in February, down from 29.9% in January and the highest Value since April 1996.

Capital Economics expects further tightening as Governor Cardoso needs to contain inflation and the country’s currency crisis.

“We have planned further rate hikes of 100 basis points at the next meetings in May and July before the rate hike cycle comes to an end. “Politics will then likely be on hold for the rest of the year,” he added.

Currency crisis

Nigeria’s naira currency has plunged around 70% against the US dollar over a year, reaching an all-time low of around 1,600 naira against the dollar in late February.

However, it has since recovered somewhat and was trading at around 1,400 naira on Tuesday morning after the CBN announced that a $7 billion backlog of imports had finally been cleared.

IBADAN, Nigeria – February 19, 2024: Demonstrators are seen during a protest against the rise in prices and harsh living conditions in Ibadan on February 19, 2024.

Samuel Alabi | Afp | Getty Images

The central bank’s February minutes revealed that the then members of the Monetary Policy Committee had different views on the causes of inflation and naira weakness, which influenced their votes.

Although the MPC increased rates by 400 basis points to 22.75% in February, there were arguments from committee members for increases as low as 100 basis points and as large as 450 basis points. Governor Cardoso had advocated for an increase of 425 basis points, Omojomolo noted before Tuesday’s decision.

“Doves warned of the risk of raising interest rates too aggressively and the structural nature of inflation, while hawks stressed the need to restore the credibility of the CBN and bring real interest rates into positive territory to further support the naira through additional foreign investment,” he added.

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2024-03-26 13:56:18