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Nigeria’s central bank sharply raised interest rates to 22.75 per cent at its first meeting since July as Africa’s most populous country hopes to contain its most severe economic crisis in almost three decades.
The bank lifted its key rate by 400 basis points as it seeks to combat soaring food and fuel prices that have caused widespread anger over reforms that the government argues are necessary to jump-start an ailing economy.
The naira has tumbled to record lows almost weekly after two devaluations and growing local scarcity of foreign currencies, falling about 70 per cent against the dollar since June.
Central bank governor Olayemi Cardoso, a former Citigroup executive who took office in September, said after the two-day meeting that “the committee’s decision was centred on the current inflationary and exchange rate pressures, projected inflation and rising inflation expectations”.
Cardoso also announced an increase in the cash reserve ratio, the percentage of commercial bank deposits to be kept with the central bank, from 32.5 per cent to 45 per cent in an effort to tame inflation by mopping up money supply.
“It’s important that we’re able to manage insecurity and that agricultural production is also improved,” he said. “Our hope is to collaborate with fiscal [policymakers] so that the other elements of inflation that are not directly within our control can be managed a lot better.”
Mma Amara Ekeruche, an economist and senior research fellow at the Abuja-based Centre for the Study of the Economies of Africa, said the rate rise was a “move in the right direction” but said the Nigerian economy’s structural problems could not be solved solely by increasing rates.
“Do [rate hikes] actually work effectively in Nigeria?” she asked. “Sometimes we don’t see the pass-through effect. There are other policy reforms that need to be put in place to tackle inflation.”
David Omojomolo, emerging market economist at Capital Economics, said in a note to clients that the central bank had showed an “appetite to tackle the inflation problem and restore its battered credibility”.
“The key will be to keep monetary conditions tight for a prolonged period in order to get inflation down,” he said, predicting that rate cuts were unlikely until next year at the earliest.
Since his inauguration in May, President Bola Tinubu has enacted sweeping reforms that have included partially ending a $10bn-a-year petrol subsidy and floating the naira after years of maintaining a peg that propped up its value.
The elimination of substantial fuel subsidies has been widely praised by international investors and diplomats but is now being blamed for economic hardship as prices have more than tripled since May.
According to the country’s statistics agency, headline annual inflation rose to 29.9 per cent last month — a level last seen in the mid-1990s during Nigeria’s dictatorship. Food prices rose 35.4 per cent.
The Nigeria Labour Congress, an umbrella organisation for trade unions, began a two-day strike on Tuesday, demanding better working conditions including an increase in the minimum wage, an improvement of public utilities and subsidies to farmers to boost domestic food production.
Security concerns caused by jihadist insurgents, criminal gangs and conflict between nomadic herders and farmers have driven many farmers from their plots in northern Nigeria.
Cardoso said the bank paid out $400mn on Tuesday to businesses it had sold dollars to in forward contracts, as the central bank aims to boost confidence in the foreign exchange markets. A backlog of these overdue contracts continues to be a concern for companies seeking to repatriate their revenues abroad.
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