Nigerian Central Bank Hikes Key Interest Rate Just Days After Naira Plunges to New Low

Following the latest meeting of the monetary policy committee, the Central Bank of Nigeria says it has hiked the monetary policy rate to 15.5%. By increasing the key interest rate by 150 basis points, the central bank hopes to “narrow the negative real interest rate gap and rein in inflation.” The rate increase came just days after the naira’s parallel exchange rate against the dollar plunged to a new low.

Narrowing the Negative Real Interest Rate Gap

According to the Central Bank of Nigeria (CBN), members of the bank’s monetary policy committee (MPC) have voted “unanimously to raise the policy rate to narrow the negative real interest rate gap and rein in inflation.” Following the vote, Nigeria’s key interest rate — the monetary policy rate (MPR) — now stands at 15.5%, up from 14%.

In a statement, the CBN said the decision to increase MPR by 150 basis points was made because members of the MPC felt that any attempt to loosen 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.

Nigeria’s inflation rate, which has now grown by 280 basis points in just four months, stood at 20.52% in August 2022. To stop it from growing further, the MPC said it is necessary for the CBN to ensure that “significant focus [is] be given to taming inflation.”

Meanwhile, the bank’s decision to hike the MPR came just days after the Nigerian currency’s exchange rate against the U.S. dollar plunged to a new all-time low. According to a Bloomberg report, the naira’s parallel market exchange rate had dropped from 715 naira for every dollar to 720 naira per dollar. On the formal market, one U.S. dollar was buying just under 440 naira.

Following the naira’s latest significant depreciation, the spread between the currency’s official and parallel market exchange rate has now widened to over 280 naira.