CBN likely to raise interest rate again as naira declines

The naira’s continued slump and Nigeria’s persistently high inflation are likely to force the Central Bank of Nigeria (CBN) to raise interest rates yet again, according to a Bloomberg survey.

The naira has experienced a sharp decline since mid-April, and inflation remains at a 28-year high of 33.7%. This economic pressure has left the Monetary Policy Committee (MPC) with few options, with most economists predicting another rate hike.

Out of 12 economists surveyed by Bloomberg, nine anticipate a 100 basis-point increase, two expect a 200 basis-point hike, and only one predicts no change when Governor Olayemi Cardoso announces the MPC’s decision on Tuesday in Abuja.

The MPC had already raised rates by 600 basis points in the first quarter of 2024, from 18.75% to 24.75%, in an attempt to curb inflation and stabilize the currency.

“The committee will likely be closely monitoring the recent currency volatility and may decide more action is needed,” said Giulia Pellegrin, senior portfolio manager at Allianz Global Investors. “Investors are still looking for some tightening measures to come out of the next MPC meeting in Nigeria,” she told Bloomberg.

Bloomberg Africa economist Yvonne Mhango believes the significant depreciation of the naira against the dollar necessitates “additional and sizeable rate hikes”. The currency has lost 28% of its value against the dollar in just the past four weeks.

Staggering Drop

This volatility follows President Bola Tinubu’s decision to loosen foreign exchange controls in June 2023. Since then, the naira has depreciated from N464 to a dollar to about N1500 now at the official market. The currency fellow to N1900 at the parallel market in February.

“We expect another 200-basis-point increase at the Central Bank of Nigeria’s May 21 meeting, with the focus being on large price gains that are likely to come,” said Mhango. “This follows a similar move in March and will help restore price stability and positive real rates,” she added.

Investors are also calling for Governor Cardoso to implement stricter liquidity-tightening measures and enhance transparency in the foreign exchange market, according to Ayodeji Dawodu, director of fixed income for Central and Eastern Europe, Middle East and Africa at BancTrust & Co.

Dawodu said transparency and increased intervention in the official market at market-driven levels are what are missing from the CBN. He further expressed concerns about the quality of Nigeria’s foreign reserves, particularly after a significant decline in April and “vague explanations” from the central bank.

While reserves dipped to $31.38 billion last month, they have since recovered slightly to $31.78 billion as of May 16.