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MPC raises interest rate by 25bps – Half a loaf Is better than none

Not long after fiscal authorities were basking in the glow of the GDP (Q3 2024: 3.46%) and unemployment numbers (Q2 2024: 4.3%), monetary authorities had to maintain market corrective measures. Though some may consider the 25 basis point hike in the anchor rate to 27.50% p.a. a slap on the wrist, a cumulative 875 basis points in one year makes a strong argument for an orthodox policy stance seeking to improve investor sentiments.

A peer comparison of leading African economies reveals a strong link between exchange rates and inflation. Nigeria’s currency has experienced the most significant depreciation against the US dollar in 2024, losing 48%, compared to Ghana (23% loss), South Africa (1.3% gain), and Kenya (21% gain). Consequently, Nigeria’s inflation rate (33.88%) far exceeds that of its peers: Ghana (22.1%), South Africa (2.8%), and Kenya (2.7%).

Where will the naira land in 2025

The MPC is expected to prioritize stabilizing the naira to mitigate inflationary pressures. Over the past two months, the naira depreciated by 3.76% to N1,753/$ but appreciated slightly to N1,747/$ following the MPC’s latest decision. The 25bps hike and sustained elevated interest rates are expected to attract foreign capital, enhancing forex liquidity to support the naira’s stability. Additionally, the Central Bank is likely to intensify efforts to boost forex liquidity through Eurobond issuances and regular forex auctions.

Combined with high global prices for Nigeria’s key export commodities (Brent oil, cocoa, and LNG), these measures are projected to strengthen the naira to a range of N1,550–N1,580/$ by the first half of 2025.

For further insights, watch Bismarck Rewane’s analysis on Channels TV’s News at Ten, where he discusses the interest rate hike, the naira outlook, and its impact this upcoming holiday season.

The video link and slides are attached.

Enjoy your read!