Nigeria’s Central Bank Raises Interest Rate to 18.75%

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has confirmed the increase of the benchmark interest rate by 25 basis points, bringing it to 18.75%.

Folashodun Shonubi, the Acting CBN Governor, revealed this during the reading of the communiqué after the fourth MPC meeting of the year on Tuesday. He stated, “In summary, the MPR (Monetary Policy Rate) was voted to raise the policy rate by 25 basis points from 18.5% to 18.75%.”

Following the suspension of Godwin Emefiele as the CBN governor, analysts had varying expectations ahead of the first MPC meeting. The CBN initiated its monetary policy tightening cycle in May 2022, with the benchmark interest rate rising from 11.5% to 18.5% in May of the current year (2023).

During the presidential campaign, President Bola Tinubu emphasized the need to reduce interest rates to stimulate investment and consumer spending, aiming to sustain the economy at a higher level.

With the recent removal of fuel subsidies, rising energy prices, and exchange rate liberalization, analysts predict persistent inflationary pressure. They suggest that the MPC should consider aggressive options to address this pressure.

This is the first MPC meeting and decision under President Tinubu’s administration since taking office on May 29. It is also the first meeting following Godwin Emefiele’s suspension as the CBN governor in June.

Emerging-market investors have expected a devaluation of Nigeria’s naira after the suspension of Emefiele last month. Analysts believe the floating of the naira and Emefiele’s suspension will need to be fine-tuned for the needed economic recovery.

“Emefiele’s removal is a necessary precondition to shift to a functioning monetary policy and exchange rate regime and will be welcomed by markets,” said Patrick Curran, senior economist at Tellimer in London.

“However, it remains to be seen what form the exchange rate adjustment will take — namely, will it be large enough to clear the market and will it be allowed to float thereafter or will it simply be a one-off devaluation to a new managed or pegged exchange rate, allowing imbalances to build back up.”

Mark Bohlund, senior credit research analyst at REDD Intelligence said last month that he expects a devaluation to come in the next six months as the inflationary impact of the phasing out of fuel subsidies has subsided.

However, the CBN has shown no sign of readiness to further devalue the naira. Shonubi said on Tuesday during the MPC meeting that the apex bank has no plans to unify rates. He explained that it is rather focused on fostering a more effective and efficient market.

“We are not trying to unify any rate. We believe that we need to encourage the market to be more efficient and more effective and that takes a bit of time,” he said.