CBN Massively Hikes Interest Rates, Naira Gains Over 25% To 1,420/$ On Black Market

The naira gained against the dollar as the Central Bank of Nigeria (CBN) took more measures including delivering a massive hike in its benchmark interest rate on Tuesday in a bid to rein in rising inflation so as to stabilise the economy.

Following the conclusion of the two-day Monetary Policy Committee (MPC) meeting held in Abuja on Tuesday, the CBN hiked the monetary policy rate (MPR) to 22.75 percent from 18.75 percent.

The central bank also raised the cash reserve ratio (CRR) to 45 percent from 32.5 percent. The asymmetric corridor was widened to +100-700 basis points around the MPR from +100/-300 basis points set in July 2023. However, the liquidity ratio remained unchanged at 30 percent.

The naira strengthened to 1,420 per dollar at the Bureau De Change segment of the foreign exchange market from over 1,800/$. In the parallel market, commonly known as the black market, the dollar closed at N1,550 as against N1,900 on Friday.

However, at the Nigerian Autonomous Foreign Exchange Market, naira depreciated to 1,615.94/$ on Tuesday from 1,582.94/$ on Monday, data from the FMDQ indicated.

Bismarck Rewane, managing director/CEO of Financial Derivatives Company Limited, said the CBN was aggressive in its tightening and that this shows that the country is now in a high interest rate environment.

He said this development will strengthen the currency, deflate the stock market in the next few days, and bring some level of sanity in the markets. He expects to see massive appreciation of the naira in the FX market.

A former top official at the CBN said quick execution and steady nerves should bring inflows to stabilise currency and moderate inflation.

He said: “Now deputy governor in charge of financial system stability needs to keep a close eye on bank balance sheets. Higher lending rates may lead to higher loan defaults at a time of reduced real disposable incomes. Higher market rates may lead to losses due to market risk in the event of sell offs to shore up liquidity by marginal banks.

“But priority is to stabilise the macro and this decision is excellent. We just need to keep an eye on risks to bank balance sheets as we move from excessively loose monetary conditions to a more responsible stance.”

According to Abiola Rasaq, former economist and head investor relations at United Bank for Africa Plc, these transitory monetary policy measures reflect the inflation-targeting orientation of the new leadership at the CBN and overall monetary policy committee.

He said this would increase the cost of funds of banks and shrink net interest margin, albeit the MPC’s overarching interest is to stem the pressure on exchange rate and consumer prices.

He said the MPC sought to gradually narrow the negative real interest rate to attract foreign portfolio investors while also incentivising domestic investors as a way of stimulating appetite for naira-denominated assets.

Rasaq said: “It’s a double-edged sword that will hurt money supply and consequently undermine employment creation, but the MPC may have limited options at this time, hence I consider this measure as transitory douses to stem the current crisis.

“Banks profitability will be challenged, and indeed, the policy measure increases the probability of loan default in the banking sector, nonetheless, it’s a short term measure that hopefully will help to cool-off pressures and allow the monetary and fiscal policy authorities some time to reset the system and implement sustainable long term measures relevant for economic growth and development.”

Razia Khan, managing director and chief economist for Africa and the Middle East Global Research at Standard Chartered Bank, emphasised the critical need to stabilise Nigeria’s FX market as an immediate priority.

She highlighted the importance of fostering a better-functioning official FX market before considering the adoption of a formal inflation target.

Analysing the policy response, Khan questioned the adequacy of the tightening measures implemented.

She said the increase in the CRR to 45 percent, acknowledging it as a meaningful tightening move, particularly with the central bank shifting away from ad-hoc CRR debits.

However, Khan raised concerns about the lack of transparency surrounding the previous CRR regime and its effectiveness, making it challenging to assess the true impact of the tightening.

“The Monetary Policy Rate itself was raised 400 bps. The signal on the tightening intent that this sends is important, and we expect that markets will not dismiss it,” she said in an email to BusinessDay.

Reacting to the MPC’s decision, Kingsley Moghalu, former deputy governor of the CBN, said on X: “Correct move by the Monetary Policy Committee to dramatically hike the Monetary Policy Rate by 400 basis point to 22.5 percent. The situation calls for nothing less if we are to check inflation over 12-18 months. We did the same a decade ago to bring inflation from 14 percent to 8 percent.”

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, said the outcome of the MPC meeting would hurt the real sector of the economy that is already contending with numerous macroeconomic challenges.

He said the increase of MPR and CRR posed a major risk to the financial intermediation role of banks in the economy.

“The increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant,” he said.