By Lukman Otunuga, Senior Research Analyst at FXTM
In a move that caught investors completely off guard on Tuesday, the Central Bank of Nigeria (CBN) raised its benchmark interest rates for the first in almost 6 years to tame inflation.
Given Nigeria’s fragile economic recovery and steps taken to achieve normality post-Covid-19, this decision from the CBN was unexpected – even as other central banks across the globe hiked rates. The monetary policy committee’s decision to raise rates by 150 basis points to 13% comes after the European Central Bank heightened expectations over taking action in July and September.
On paper, a rate hike could limit inflation risks at a time when external and domestic factors are threatening Nigeria’s economy. Ongoing geopolitical risks, extreme weather, and supply-chain disruptions could feed the inflation monster, while pre-election spending ahead of the general elections is likely to exacerbate the negative situation.
But the key question is whether Nigeria is in a position to handle higher interest rates?
It must be kept in mind that economic growth expanded 3.1% during the first quarter of 2022. While this marked the sixth consecutive quarter of growth, the expansion slowed for the third consecutive quarter. The CBN is certainly in a tricky position, especially if the rate hike results in slower growth in 2022.
There are many questions that come to mind following the CBN’s decision…
Was the central bank pressured to join the hiking bandwagon after seeing the South African Bank take action? Will the CBN raise interest rates again in 2022? Could the rate hike result in a stronger Naira? As higher interest rates tend to discourage consumer and business spending, what does this mean for growth? Will this improve foreign exchange reserves?
The biggest takeaway from this development is to expect the unexpected from the CBN moving forward.