CBN expected to raise interest rate further as naira strengthens

The Central Bank of Nigeria will announce its latest interest rate decision today, a month after delivering a huge increase of 4 percentage points to 22.75 percent.

The bank’s decision in February has helped drive a surge in the value of the naira, with the currency recovering from over 1600 to a dollar to a little above 1400 on Monday.

But it has yet failed to rein in inflation which is at the highest in 28 years.

A high interest rate, theoretically, reduces money supply and cools consumer prices. It should also attract foreign investors to local assets such as stocks and bonds for high returns. The inflow of foreign exchange provides support for the naira.

The CBN said overseas remittances rose more than fourfold to $1.3 billion in February from January, while foreign-investor portfolio asset purchases exceeded $1 billion in the month, bringing total inflows this year to at least $2.3 billion. That compares with $3.9 billion for the whole of 2023.

However, inflation rose 31.7 percent last month, fuelling the worst cost-of-living crisis in the country in a generation.

As the bank announces the decision of its monetary policy committee Tuesday, analysts expect the central bank will raise rates further to address inflation. The CBN wants inflation at 21.4 percent this year.

The median estimate of analysts surveyed by Bloomberg predict a 125 basis-point increase in the key rate to 24 percent.

A further hike will hopefully also help the naira, which the bank expects to strengthen further. On Monday, it announced the sales of dollars to currency exchanges (BDCs) at 1251 to a dollar – far lower than 1408.04 the currency closed on Monday on the official window.

What are analysts saying?

You can see that the Naira has been doing well since the last MPC meeting. The MPC should hold all existing rates constant till its next meeting. The government should also look inwards and ensure that we consume more of what we produce. This will help curb unnecessary demand for the dollar and further strengthen the Naira.

Okechukwu Unegbu, former president of Chartered Institute of Bankers of Nigeria, to NAN

Given the signals coming from its governor and the inflation targeting stance of the CBN, another round of tightening via the MPR should be expected in March by at least 100 basis point (one percentage point). My personal view, however, is that the MPC should pause for now to see how the jumbo rate hike carried out in February transmits through the economy.

Uche Uwaleke, director, Institute of Capital Market Studies at the Nasarawa State University, Keffi, to NAN

The larger than expected rise in inflation for the month of February will warrant another bold move by the committee to materially rein-in inflation.

Rand Merchant Bank’s Oyinkansola Samuel to Bloomberg

Nigeria’s inflation surge warrants an outsized interest rate hike in March. We expect another 400-basis-point increase to follow a similar move in February. That will establish a ceiling for inflation and restore positive real rates.

Yvonne Mhango, Africa economist, to Bloomberg

The phased approach CBN has adopted so far has not succeeded in bringing back foreign investors to the local bond market en masse and with confidence. To be clear, the CBN has taken many positive steps forward in recent weeks, but it needs to step up its tightening action in pace and decisiveness or it risks losing foreign investors’ attention to other opportunities in the frontier markets space, such as Egypt or Kenya.

Giulia Pellegrini, senior portfolio manager at Allianz Global Investors, to Bloomberg