CBN signals rate pause ahead after third straight hike to 26.25%

The Central Bank of Nigeria (CBN) signalled that it may soon hit the brakes on its aggressive monetary tightening after its third straight interest rate hike on Tuesday.

In a bid to tame inflation and aid the ailing naira, the CBN raised the benchmark interest rate by 150 basis points to 26.25 percent.

“There is light at the end of the tunnel,” Olayemi Cardoso, the CBN governor, said. “And that is because as much as we see an increase in inflation, when you go down to the specifics in terms of food, core, and headline inflation, you see that it is moderating and decelerating in increment and that’s good news,” Cardoso said.

“For the first time since October, we’ve seen a relatively significant moderation in the rate of increase on those components of inflation.

“And I believe that the CBN’s tools are working. I’ve said several times, and I’ll say again, there’s no magic wand. These are things that need to take their own time. The pass-through effect of measures in advanced countries or developing countries takes time,” Cardoso said.

“But at least I’m confident, and the figures show that we are beginning to get some relief. In another couple of months, we will see more positive outcomes for what the central bank has been doing,” he said.

The 12 members of the MPC also agreed to hold other parameters unchanged. Consequently, the CBN retained the asymmetric corridor around the MPR at +100/-300 basis points, cash reserve ratio (CRR) at 45 percent, and retained the liquidity ratio (LR) at 30 percent.

In April 2024, the headline inflation rate rose to 33.69 percent, up from 33.20 percent in March 2024. This represents an increase of 0.49 percentage points, according to the National Bureau of Statistics (NBS).

Data from the NBS showed that month-on-month food inflation declined to 2.5 percent in April from 3.6 percent recorded in March 2024.

Analysts had expected a 100 basis point hike in interest rate.

“The Central Bank of Nigeria raised its policy rate by a higher-than-anticipated 150bps to 26.25 percent, with the Cardoso over delivering – once again – on market expectations,” Razia Khan, managing director, Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, said.

“Encouragingly, the Central Bank of Nigeria (CBN) expressed its belief that with month-on-month inflation slowing, the peak in inflation is likely near – a view we endorse, especially considering the more pronounced base effect from June,” Khan said.

“For markets, however, the key question is whether there will be transmission of this new tightening through Open Market Operations (OMOs), with the belief that with the Debt Management Office (DMO) having already attained a substantial amount of its domestic borrowing target, transmission at DMO auctions is not necessarily assured,” she added.

That transmission will determine Nigeria’s ability to attract further foreign exchange-stabilising inflows into local currency markets.

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), said the new rate hike is an additional cross to be borne by businesses who have exposure to bank credit facilities.

“Naturally, a rigid monetarist disposition by the Central Bank is expected, but we need to reckon with the costs to the economy,” Yusuf said.

“Hopefully, with the positive outlook for domestic refining of petroleum products, we may begin to see a moderation in energy cost and a pass-through effect on general price level. This is one silver lining that is on the horizon at the moment. Necessary fiscal policy support is urgently needed to compensate for the adverse impact of extreme monetarism on the economy,” Yusuf said.

According to analysts at Comercio Partners, the apex bank’s rate hike is expected to exert increased strain on the economy, particularly on businesses.

The economy, already grappling with numerous social and economic challenges, may face further destabilisation. An increase in the minimum cost of borrowing could slow down the corporate sector, potentially leading to a decline in the stock market.

They said the recent interest rate hike is expected to stimulate activity in the fixed-income market by making new securities more attractive.

“New bonds will be issued with higher yields to reflect the increased policy rate. Investors will demand higher returns to compensate for the elevated interest rate environment. As a result, long-duration bonds, which are more sensitive to interest rate changes, are likely to experience greater price declines compared to short-duration bonds as rates rise,” the Comercio analysts said.

Reacting to the decision of the CBN, Joseph Nnanna, Chief Economist, Development Bank of Nigeria, said that the CBN’s recent rate hike might impede real sector growth and hinder GDP growth this year.

“The 150bps rate hike is pernicious to the real economy as households and MSMEs will feel the impact immediately. However, the rate hike has a signalling effect on the fiscal authorities. It is now left to the fiscal side to respond to the signals. They need to improve fiscal discipline and prioritise spending to improve growth. I suspect that real GDP will not get to 3.3 percent,” he said.

He also stated that the CBN might not achieve their inflation target of 21 percent this year, but may bring the rate down to 24.5 or 28 percent if the hike continues.

Biodun Adedipe, Chief consultant, Biodun Adedipe Associates, stated that the rate hike will contract the GDP growth rate, resulting in the moderation of the GDP targets for 2024.

“Now, GDP may grow slightly over 3 percent, but if the hike continues in the second quarter of this year, we may likely not have a 3 percent GDP growth rate. We seem to be overplaying the monetary policy tune when we should face the fiscal authorities squarely as the ball is now in their court,” he stated.

“For banks, the more expensive loans are, the more troubled loans you create. Banks will not be creating the volume of loans that can drive output, and people who are already stuck with the banks will see a significant increase in their cost of doing business and selling prices,” he said.