(Bloomberg) -- The Central Bank of Nigeria surprised financial markets by raising borrowing costs to a fresh record high to quell inflation, support the naira and attract investments.
The monetary policy committee unanimously decided to lift the benchmark rate for a 13th straight meeting to 27.25% from 26.75%, Governor Olayemi Cardoso said Tuesday at a briefing. Only one of 12 economists in a Bloomberg survey expected an increase.
“We are not out of the woods yet, we really cannot take any chances,” said Cardoso. The MPC remains resolute in its focus to bring inflation under control, he said.
It also aims to achieve a positive inflation-adjusted interest rate to attract investment into the economy, Cardoso said.
“This would enhance the economy’s competitiveness for international capital, thereby improving the exchange rates,” he said.
Nigerian dollar bonds extended gains across the curve after the surprise hike, with notes due in 2033 rising more than 0.8 cent on the dollar to 84.8 cents, according to indicative pricing data compiled by Bloomberg. The country’s sovereign bonds were among the top performers in emerging markets.
The decision makes Nigeria an outlier at a time when most central banks across the world are either holding or cutting borrowing costs. Those opting for reductions include the US Federal Reserve, Indonesia and South Africa, while Taiwan, Norway, Ukraine, Turkey and Angola held them steady.
What Bloomberg Economics Says...
“The Central Bank of Nigeria’s surprise rate hike suggests it remains worried about rising risk of inflation, not least from energy prices. And we think it is not done. We expect more hikes in the next two quarters before the central bank is convinced it has tamed inflation and restored real positive rates.”
— Yvonne Mhango, Africa economist. To read more, click here.
The MPC has lifted the benchmark rate by 15.75 percentage points since May 2022 to crush inflation. While price increases slowed for a second successive month in August to an annual pace of 32.2%, new pressures have emerged.
Authorities earlier this month raised gasoline prices by 45% in another attempt to get rid of costly fuel subsidies, devastating floods have hit Nigeria’s food-producing regions and the currency remains under pressure.
The MPC was also concerned that core inflation remains elevated, Cardoso said.
Dangote’s Refinery
The MPC expects the start of gasoline production at Nigerian billionaire Aliko Dangote’s mega oil refinery could moderate transportation costs and significantly support the easing of food price pressures in the short to medium term, the governor said.
“This is also expected to moderate foreign-exchange demand for importation of refined petroleum products with a positive spillover on external reserves and improvement in the overall balance-of-payment position,” he said.
Still, the decision will be unwelcome by many frustrated by the high cost of living.
Crowds chanting “we are hungry” marched through the streets of several cities in August demanding the government fully reinstate fuel subsidies, cut electricity tariffs and reduce duties on imports. A clampdown by security forces left at least 21 dead and more than 100 people were arrested.
--With assistance from Simbarashe Gumbo, Emele Onu and Zijia Song.
(Updates with chart and analyst comment.)
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