Nigeria’s central bank increased its benchmark lending rate by 100 basis points (bps) to 17.5% on Tuesday in order to control inflation without stifling credit to the private sector,
On February 25, Nigerians will go to the polls to elect President Muhammadu Buhari’s successor, and given the country’s double-digit inflation, the economy is a big concern for voters.
The central bank made its decision after December’s inflation fell for the first time in 11 months to 21.34% from November’s 21.47%.
However, Godwin Emefiele, the governor of the Central Bank of Nigeria, claimed that the MPC members did not believe the reduction was significant enough to support either keeping or lowering the rate.
“It is not yet time to celebrate for us. The question was how much should we tighten, “At a press conference, Emefiele spoke.
After raising rates by 500 basis points last year to combat inflation, which was at its highest level in nearly two decades, some observers had anticipated that the central bank would maintain its current level of interest rates.
According to Razia Khan, managing director, and chief economist for Africa and the Middle East at Standard Chartered, “our immediate read on this is that the CBN is showing more anti-inflation resolve, and preparing the way – perhaps – for an eventual FX policy liberalization that will require a reset to higher market rates.”
As a symbol of the country’s pride, Buhari’s administration has worked to maintain the strength of the naira, but that effort was rendered unsustainable in 2016 when oil prices crashed. Parallel currency rates were implemented to prevent a devaluation, although many economists have argued that the convoluted system should be abandoned.
As part of attempts to reduce the amount of money in circulation and control inflation, the central bank has set a deadline of January 31 for the withdrawal of high value naira bank notes.
Prior to the date when the old currency notes stop being accepted as legal money, around 1.3 trillion nairas ($2.9 billion) had been deposited into the central bank by last week, according to Emefiele.
Emefiele predicted that the economy will expand at a slower rate this year—2.88%—than the administration had anticipated.
According to him, the biggest economic shocks to Africa’s largest economy came from exchange rate pressure, widespread instability, sporadic fuel shortages, and high energy prices.