The Central Bank of Nigeria (CBN) has announced a significant 400 basis point increase in its benchmark interest rate, raising it from 18.75% to 22.75%. This drastic move aims to address the ongoing economic crisis and dwindling value of the naira.
At the first monetary policy meeting of the bank under new governor, Yemi Cardoso, the CBN cited the need to curb rampant inflation and attract foreign investment as the primary reasons for the interest rate hike.
By increasing the costs of borrowing, the central bank hopes to slow spending and stabilize prices. Additionally, higher interest rates are intended to entice foreign investors back to Nigeria, alleviating the severe dollar shortage and strengthening the naira.
Economists and business leaders remain divided on the potential impact of this decision. Critics argue that the elevated borrowing costs could stifle economic growth, making it harder for industries and businesses to invest and expand.
The central bank also raised the cash reserve ratio from 32.5 percent to 45 percent. It is the amount banks must keep as reserves with the central bank from depositors’ funds, also meant to further squeeze money supply.
“The previous policy rate hikes have slowed the rise in inflationary pressure but not to a desirable extent. Members concluded that inflation could become more persistent in the medium term and pose more regulatory challenges if not effectively anchored,” Mr Cardoso said Tuesday.
Contentious reforms
He said that all 12 members of the Monetary Policy Committee participated in the rate decision, marking the first such decision since Cardoso took office last September. Economists had anticipated a significant hike but were split on the magnitude the central bank would pursue.
Inflation has been driven by contentious reforms implemented by President Bola Tinubu in his inaugural year, which included terminating a costly fuel subsidy and devaluing the naira twice.
Naira fell to below 1900 to a dollar last week, down from about 464 when the president took office last May. The currency has gained in the last few days, closing at ₦1582.94 on Monday.
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