For Cardoso, Nigeria’s jumbo rate hike was not big enough

… Naira shows more sign of rebound

Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), wanted an even larger interest-rate increase than was delivered last month, the latest sign of his commitment to tighter monetary policy.

According to minutes from the February 26-27 Monetary Policy Committee (MPC) meeting published Monday, Cardoso, chairing his first meeting since he took office in September, voted for a 425-basis-points hike to 23 percent.

The 12-member committee instead settled for a 400-basis-points hike to 22.75 percent, still a record hike that took several analysts by surprise.

Read also: Cardoso’s tough job & the dilemma of the MPC

Cardoso’s rate target was the biggest after Aloysius Ordu, who voted for an increase of 450 basis points, confirming him as one of the most hawkish members of the MPC.

He argued that hiking rates substantially will help steer Nigeria towards achieving positive real interest rates, a crucial goal to stimulate savings and investment within the domestic economy.

“This strategic move also holds the potential to attract the capital inflows necessary to enhance liquidity in the foreign exchange market and bolster the currency in the immediate term,” Cardoso said.

“While cognisant of the potential drawbacks of a contractionary monetary policy stance, such as impacting output growth and lending rates, constraining credit availability and affordability to small-scale businesses and consumers, as well as affecting government borrowing costs and liquidity management, I believe these short-term sacrifices are crucial in our pursuit of achieving price stability and sustained economic growth,” he said.

Analysts say the hawkish stance of the MPC members may signal another rate hike at their next meeting. Since the committee last met in February, inflation has jumped to 31.7 percent, according to the National Bureau of Statistics. A BusinessDay survey on six economists showed expectations for a 100-basis-points hike.

Cardoso’s monetary reforms have started to yield results with the gap between the official and unofficial exchange rates narrowing to almost zero compared to 30 percent in January.

That’s after foreign inflows surged and diaspora remittances increased on the back of a more transparent pricing of foreign exchange in the official market and the increase in market interest rates. Nigeria has been able to attract over $2 billion in foreign investment inflows in the first three months of 2024 compared to $3 billion in the whole of last year, according to CBN data.

Cardoso however admitted that the current inflationary pressures are multifaceted and not solely monetary in nature and called for a “comprehensive approach beyond monetary policy.”

Inflation in Nigeria, which peaked at a 28-year high of 31.70 percent in February, has been particularly exacerbated by the surge in food prices due to factors including low productivity, insecurity, and elevated energy costs post fuel subsidy removal.

“Addressing these structural challenges calls for a holistic response involving non-monetary stakeholders to implement appropriate actions,” Cardoso said.

Naira shows more signs of rebound

Further signs of the improving prospect for the Nigerian currency emerged from Tuesday’s daily transaction data, which showed that the naira had appreciated to 1,583/$ on the official market, the Nigerian Autonomous Foreign Exchange Market, as at 12:57pm.

Data tracking transactions on the main FX window where volumes are rising and traders are now increasingly quoting rates below N1,600 to the dollar attest to the naira strengthening, traders informed BusinessDay.

Data available to BusinessDay show that on Monday, more than $306 million was traded in 271 deals and with 73 or about 43 percent of the deals coming in the rate range of between N1,400/$-N1,450/$.

Only 37 deals or about 9 percent came in the N1,600/$-N1,650/$ rate range.

The data for the day also showed that 132 deals came at a range below N1,600/$ for a total of $102.98 million.

“The naira is turning the corner and we now expect a gradual climb from here,” one senior dealer told our reporter. He added: “A month ago, most deals were quoted at over N1,600/$ but as you can see today, the percentage of quotes at or above N1,600/$ has fallen significantly.”

Nigeria is competing for investors’ attention with countries like Egypt where there has been significant interest lately because of the huge inflow of dollars flowing from the Gulf and even the World Bank which announced a support of $6 billion for the north African nation on Tuesday.

But traders said attention is shifting back to Nigeria on the back of a rise in foreign reserves to $34.37 billion and a rare convergence in the official and black market rates of the local currency is giving people in Nigeria hope of a stronger naira after a tumultuous three months that brought pain and misery.

The official and parallel-market exchange rates for the naira have converged in recent days as capital inflows surged, giving credence to a forecast by Goldman Sachs Group that the Nigerian currency will strengthen over the coming months.

The naira was traded at 1,609 per dollar on the official market on Thursday last week, according to Lagos-based FMDQ, which tracks the data, almost in line with the parallel-market rate of N1,610/$.

The current convergence in the two rates is the longest streak since the nation initiated FX market reforms in June.

And data from the CBN showed that the foreign reserves increased by 3.62 percent to $34.37 billion as of March 12, up from $33.17 billion recorded at the beginning of February 2024.

Africa’s most populous nation first implemented measures in June to attract inflows, effectively devaluing the naira and pushing the official and unofficial market rates closer together for a brief period. It allowed the local currency to weaken again in January.