Nigeria’s Central Bank has raised its interest rate to 27.5% in its final monetary policy meeting of the year, following a rise in inflation in October. The monetary policy committee (MPC) increased the benchmark rate by 25 basis points to address the growing inflationary pressures.
Governor Olayemi Cardoso explained at a media briefing that the decision was made in response to the uptick in both food and core inflation measures, which saw significant year-on-year increases in October 2024. “Members agreed unanimously to stay focused on addressing price developments,” he said.
The rate hike follows an unexpectedly strong economic performance in Q3 2024, with Nigeria’s GDP growing by 3.46%, largely driven by the services sector. This marks an 8.75 percentage point increase in the benchmark rate since the beginning of the year, aimed at curbing inflation. Nigeria’s headline inflation surged to 33.8% in October, largely due to rising fuel prices and flooding in key food-producing regions. Most economists had predicted a 25 basis point increase.
The recent interest rate hike by Nigeria’s Central Bank could further boost the net interest income of the country’s largest banks. Guaranty Trust Holding Co., Zenith Bank Plc, United Bank for Africa Plc, and FBN Holdings Plc have all reported that their net interest income has more than doubled.
However, analysts caution that while the rate hike could benefit banks, it might also lead to an increase in loan defaults, potentially raising the non-performing loans ratio. “The hike could lead to an increase in the loan default rate, which would impact the non-performing loans ratio,” said Samuel Onyekanmi, an analyst at Norrenberger.
There are concerns that Nigeria’s aggressive rate hikes, without complementary fiscal policies, may not be enough to control inflation. “To truly address inflation, the government must take action to reduce the structural vulnerabilities driving these inflationary spikes. Without that, the Central Bank will be fighting an uphill battle, and the inflation issue will persist,” warned David Omojomolo, Africa economist at Capital Economics.