Naira gains after CBN rate hike

The naira on Tuesday strengthened against the dollar at the official market after the Central Bank of Nigeria (CBN) increased its benchmark interest rate for the first time since August 2016.

After trading on Tuesday, the naira closed at N419.00 per dollar, compared to N420.33/$ on Monday, according to data from the FMDQ Group.

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-day Monetary Policy Committee meeting in Abuja, raised the monetary policy rate (MPR) by 150 basis points to 13 percent.

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.

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.

Reacting to the CBN’s decision, Razia Khan, managing director and chief economist, Africa and Middle East Global Research at Standard Chartered Bank, said, “Given the speed of acceleration in Nigerian CPI (consumer price index) 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.”

“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,” she said.

Read also: Stocks shed over N500bn as CBN hikes benchmark interest rate

London-based Capital Economics said the CBN’s 150 basis points hike largely reversed the 200 basis points of cuts since the onset of the pandemic, adding that policymakers were clearly spooked by the latest inflation reading that showed a jump in the headline rate.

“Most analysts – including us – polled by Bloomberg expected the policy rate to remain unchanged. And the rate hike was much bigger than the most hawkish forecast (for a 50bp hike),” said Virag Forizs, emerging market economist at Capital Economics.

She said the recent hawkish turn by global central banks probably also factored into the CBN’s decision.

“That is likely to have contributed to increased balance of payments strains in Nigeria, with the naira weakening past 600/$ on the black market in recent weeks,” she added. “With inflation likely to edge higher in the coming months, we expect another rate hike, to 14.00 percent, in July.”

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.

According to them, 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,” they added.