Nigerian Central Bank Hikes Key Interest Rate Just Days After Naira Plunges to New Low – Following the most recent meeting of the monetary policy committee, the Central Bank of Nigeria announced that the monetary policy rate has been increased to 15.5%. By increasing the key interest rate by 150 basis points, the central bank intends to “narrow the negative real interest rate gap and rein in inflation.” The rate increase occurred just days after the parallel exchange rate of the naira against the dollar hit a new low.
According to the Central Bank of Nigeria (CBN), members of the bank’s monetary policy committee (MPC) voted “unanimously to increase the policy rate in order to close the negative real interest rate gap and rein in inflation.” Following the vote, Nigeria’s key interest rate, known as the monetary policy rate (MPR), has increased from 14% to 15.5%.
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The CBN explained in a statement that the decision to raise the MPR by 150 basis points was made because members of the MPC believed that any attempt to lower the policy rate would be detrimental.
“At this MPC meeting, the option to loosen the policy rate was not considered as this would be gravely detrimental to reining-in inflation. The Committee thus voted unanimously to raise the Monetary Policy Rate (MPR) and the Cash Reserve Requirement (CRR). Ten members voted to raise the MPR by 150 basis points, one member by 100 basis points, and another member by 50 basis points.”
Inflation in Nigeria increased by 280 basis points in just four months, reaching 20.52% in August 2022. To prevent it from escalating further, the MPC stated that the CBN must place “considerable emphasis” on containing inflation.
The bank’s decision to increase the MPR was made just days after the Nigerian currency’s exchange rate against the U.S. dollar hit a new record low.
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According to a report by Bloomberg, the parallel market exchange rate for the naira dropped from 715 naira per dollar to 720 naira per dollar. On the formal market, one US dollar was equivalent to just under 440 Nigerian naira.
Following the most recent significant depreciation of the naira, the difference between the official and parallel market exchange rates for the currency has increased to over 280 naira.
