CBN Raises Interest Rate to 26.75% Amid Inflation Concerns

The Central Bank of Nigeria (CBN) has raised its benchmark interest rate by 50 basis points, from 26.25% to 26.75%, in a bid to combat rising inflation. The announcement was made by CBN Governor Olayemi Cardoso at the end of the bank’s 296th Monetary Policy Committee (MPC) meeting held in Abuja on Tuesday, July 23.

The MPC also decided to maintain the Cash Reserve Ratio (CRR) for Deposit Money Banks at 45% and set it at 14% for merchant banks. Governor Cardoso emphasized the committee’s awareness of the impact of rising prices on households and businesses, pledging to bring inflation under control despite the recent uptick in June 2024. Prices are expected to stabilize in the near term.

This marks the fourth interest rate hike by the CBN this year, as Nigeria faces its highest inflation in 28 years and increased pressure on the naira in both official and parallel markets. The decision to raise the main lending rate to 26.75% from 26.25% was necessary to address inflationary pressures, particularly from rising food and energy costs, according to Cardoso.

“While monetary policy has been moderating aggregate demand, rising food and energy costs continue to exert upward pressure on price development,” Cardoso said at a press conference.

The CBN's decision follows previous increases of 150 basis points in May, 200 basis points in March, and 400 basis points in February, the largest hike in 17 years. Analysts polled by Reuters had predicted this latest 50 basis point hike, as inflation rose for the 19th consecutive month to 34.19% in June.

David Omojomolo, Africa economist at Capital Economics, noted that this could be the final rate hike in the current cycle but warned of potential further tightening if inflation surprises continue.
“There’s clearly a risk that further inflation surprises prompt the central bank to tighten monetary conditions further, either through outright rate hikes or by tweaking liquidity provision,” he said.

Recent measures by President Bola Tinubu’s administration, including raising the minimum wage to 70,000 naira ($44) a month and requesting lawmakers to approve 6.2 trillion naira in additional spending, could potentially fuel inflation further. Additionally, the removal of petrol and electricity subsidies and the devaluation of the naira have added to price pressures.

Governor Cardoso has indicated that interest rates will remain high as long as necessary to bring down inflation. The International Monetary Fund (IMF) in May maintained its growth forecast for Nigeria’s economy at 3.3% for 2024, up from 2.9% last year, citing a recovery in services and trade sectors. The IMF has also welcomed the CBN's recent rate hikes and called for a data-driven approach to further tightening while urging the bank to build up its forex reserves.