Nigeria’s Central Bank has made the decision to increase its interest rate to 27.5% in response to a surge in inflation that was observed in October. The Monetary Policy Committee made the decision to raise the key interest rate by 25 basis points in order to address the escalating inflationary pressures that the country is facing.
The decision to raise the interest rate was made in light of growing concerns about inflation, with both food and core inflation seeing year-on-year increases in October 2024. Governor Olayemi Cardoso highlighted the need to prioritize addressing these price changes during a press conference following the meeting.
The interest rate hike comes on the back of a stronger-than-expected economic performance in Nigeria in the third quarter of 2024. The country’s GDP expanded by 3.46%, driven largely by growth in the services sector.
Throughout the year, the MPC has steadily increased the benchmark rate by a total of 8.75 percentage points in an effort to combat inflation. In October, Nigeria’s headline inflation rose to 33.8%, driven by factors such as fuel price hikes and floods in key food-producing regions. The majority of economists surveyed had predicted a 25 basis point increase in the interest rate.
The recent interest rate hike is anticipated to have a positive impact on the net interest income of Nigerian banks. The country’s four largest banks—Guaranty Trust Holding Co, Zenith Bank Plc, United Bank for Africa Plc, and FBN Holdings Plc—have all reported significant increases in net interest income.
However, analysts have warned that the aggressive interest rate hikes in Nigeria may not be enough to effectively control inflation without corresponding fiscal measures. David Omojomolo, an Africa economist at Capital Economics in London, emphasized the need for the government to address the structural weaknesses driving inflationary spikes in order to successfully combat inflation.
The decision to increase the interest rate by the Central Bank is a critical step in addressing inflationary pressures in Nigeria. However, a comprehensive approach that combines monetary policy measures with fiscal reforms will be essential in achieving long-term stability in the country’s economy.
