The naira on Tuesday gained 0.32 percent against the dollar at the official market after the Central Bank of Nigeria (CBN) increased its benchmark interest rate for the first time in six years.
After trading on Tuesday, the naira closed at N419.00 per dollar as against the last close of N420.33 on Monday, data from the FMDQ indicated.
The naira also strengthened against the dollar at the parallel market popularly called the black market as it gained N2 or 0.33 percent to close at N608 per dollar from N610 the previous day, traders told BusinessDay.
The CBN, by unanimous vote after the two days Monetary Policy Committee (MPC) in Abuja, raised the Monetary Policy Rate (MPR) by 150 basis points to 13 percent, the first time in six years.
The committee believes that tightening would help moderate the inflationary pressure and exchange rate depreciation as well as moderate the speed of capital flow reversals, provide an incentive for foreign capital inflows, and sustain remittances.
Furthermore, tightening could moderate the FGN’s domestic borrowing as the government debt-service-to-revenue ratio has increased considerably in recent times and threatens debt sustainability.
Nigeria’s inflation rose to 16.82 percent in April 2022, which was 0.9 percent points higher than the 15.92 percent recorded in the previous month of March 2022.
Reacting to the CBN’s decision, Razia Khan, managing director, chief economist, Africa and Middle East Global Research at Standard Chartered Bank, said, “Given the speed of acceleration in Nigerian CPI inflation, we had forecast a ‘token’ 50 bps hike, but the CBN has delivered much more than this with its 150 bps hike – which has the appearance of much more than just a token move,” Khan said.
“The obvious question here is whether this might be the precursor to a Foreign Exchange (FX) policy that might make today’s tightening that much more effective. This could be the most important signal yet of eventual FX policy intentions,” Khan said.
Read also: CBN disowns statement on withdrawal of naira notes from circulation
The decision to hike rates was majorly driven by the goal of achieving price stability amidst economic growth and keeping foreign investors in the economy, analysts at Cowry Asset Management said.
Gross Domestic Product (GDP) grew by 3.11 percent (year-on-year) in real terms in the first quarter of 2022, showing a sustained positive growth for six consecutive quarters since the recession witnessed in 2020 when negative growth rates were recorded in quarter two and three of 2020, the National Bureau of Statistics (NBS) said Monday.
According to the analysts, with the current inflation rate at 16.82 percent and previous MPR benchmark at 11.50 percent there has been a disparity that will deter foreign portfolio investments and this has forced the Central bank to raise rates to attract foreign investors and cope with the rising inflation.
A higher MPR of 13.00 percent will better compensate and aid foreign investors in hedging against Nigeria’s galloping inflation rate and depreciation of the naira.
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