Nigeria’s central bank surprised the market on Tuesday by raising its benchmark lending rate by 50 basis points to 27.25%.
This is the fifth rate hike of the year and reflects the bank’s ongoing battle against inflationary pressures, despite signs of easing inflation in recent months.
The decision, made by the Monetary Policy Committee (MPC), prioritizes controlling inflation over economic growth as the country faces one of its worst cost-of-living crises in decades.
The unexpected rate increase caught analysts off guard, with many predicting the central bank would maintain the rate at its previous level.
The MPC, led by Central Bank Governor Olayemi Cardoso, expressed concern over persistently high core inflation, which remains elevated due to rising energy prices.
This move signifies the central bank’s commitment to stabilizing the economy despite the challenging conditions.
Rate hikes continue despite falling inflation data
The latest increase marks the fifth time this year the Central Bank of Nigeria (CBN) has raised rates.
Earlier hikes included a 50 basis point (bps) increase in July, 150 bps in May, 200 bps in March, and 400 bps in February.
The February hike was the largest in 17 years.
Although inflation has fallen for two consecutive months, reaching 32.15% in August, the central bank’s decision indicates lingering concerns over inflationary risks.
Despite the recent moderation in headline inflation, driven primarily by lower food prices, core inflation remains a key concern for policymakers.
The persistence of inflationary pressures, particularly those linked to rising energy costs, has motivated the central bank to take further action.
Governor Cardoso emphasized that while headline inflation may be easing, core inflation is still high and poses significant risks to the economy.
Analysts surprised by central bank’s bold move
Many analysts had predicted no rate change for September, given the recent decline in inflation and stabilization of the naira, which has been supported by regular dollar sales from the central bank.
The decision to raise rates despite these improvements highlights the central bank’s concern about the broader inflation outlook and potential future price pressures.
Nigeria’s economic outlook remains challenging.
The country has faced severe inflationary pressures since President Bola Tinubu’s government implemented significant economic reforms, including cutting petrol and electricity subsidies and devaluing the naira.
These reforms have exacerbated the cost-of-living crisis, with citizens facing higher prices for essential goods and services.
In addition to the inflationary pressures caused by subsidy cuts, crop damage due to flooding in the northern regions has raised concerns about future food supply, which could lead to further increases in food prices.
These factors, combined with rising borrowing costs, create a complex economic environment that requires careful management by the central bank.
While the rate hike aims to curb inflation, the move may have other economic implications.
Higher interest rates are likely to increase borrowing costs for businesses and consumers, potentially slowing economic growth.
Nonetheless, the central bank believes stabilizing inflation is necessary to protect the broader economy.
The MPC’s decision reflects a cautious approach to managing inflation while acknowledging the challenges posed by rising energy prices and potential supply-side shocks.
The central bank will continue to monitor economic conditions closely and may implement further rate adjustments if inflationary pressures persist.
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