The Central Bank of Nigeria raises interest rates to 24.75% in response to high inflation and the currency crisis

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

The Central Bank of Nigeria announced that its key monetary policy rate will rise to 24.75% from 22.75%, the second consecutive rise after a 400 basis point increase in February.

Governor Olayemi Cardoso said in a press conference that policymakers believe they need to continue tightening monetary policy in order to tame runaway inflation, according to Reuters.

David Omogomolo, Africa economist at Capital Economics, said the latest move is “further evidence that officials are aggressively fighting to address the inflation problem and restore its damaged credibility,” despite being smaller than the previous increase.

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

“However, the fact that officials have raised interest rates further than expected suggests that combating inflation, which reached 31.7% year-on-year in February and is set to continue rising over the coming months, takes precedence.”

Minutes from the central bank's February meeting, published last week, showed policymakers making a hawkish case for raising interest rates significantly to rein in high inflation, which reached an annual rate of 31.7% in February, up from 29.9% in January, the highest rate. . Since April 1996.

Capital Economics expects further tightening, given Governor Cardoso's need to bring down the curtain on the country's inflation and currency crises.

“We expected another 100 basis point hike at each of the upcoming meetings in May and July before the lifting cycle ends. Policy will then likely be left on hold for the rest of the year,” he added.

The Nigerian naira has fallen about 70% against the US dollar over the course of a year, reaching an all-time low of about 1,600 naira to the dollar in late February.

However, it has since regained some ground, trading at around 1,400 naira as of Tuesday morning after the Central Bank of Nigeria announced that a $7 billion import backlog had finally been cleared.

The central bank minutes for February revealed that MPC members at the time had different views on the drivers of inflation and a weak naira, which influenced their votes.

Although the MPC raised interest rates by 400 basis points to 22.75% in February, there were arguments for rate hikes as small as 100 basis points and as large as 450 points from committee members. Governor Cardoso had called for a 425 basis point move, Omogomolo 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 Central Bank of Nigeria and move real interest rates into positive territory to further support the naira through additional foreign investment,” he added.