Nigeria: CBN Signals Continued Tightening in 2024, Anticipates Interest Rate Hikes

The Central Bank of Nigeria (CBN) is poised to maintain its policy of tightening monetary rates throughout 2024, responding to a persistent surge in the country’s headline inflation rate. This contractionary approach is expected to prompt further interest rate hikes in Nigeria amid economic uncertainties, as the apex bank reconvenes its bimonthly policy committee meeting in February.

As analysts anticipate the upcoming monetary policy committee meeting, projections indicate that the benchmark interest rate is likely to see additional increments, driven by the imperative need to swiftly address inflation concerns. The inflationary pressures have, in part, resulted from policy shifts during the tenure of former President Muhammadu Buhari and the subsequent inflation-fighting strategies employed by former CBN governor Godwin Emefiele.

The escalation of price levels has persisted since the closure of Nigerian borders in 2019. This move, intended to boost local industries without a foundational infrastructure advantage over imports, has been deemed one of the misconceived policies implemented in recent years.

“…we expect the CBN to raise the MPR to about 19.5% before December 2024 given the need to effectively manage inflation, mop up liquidity and raise interest rates to a level where long-term savers earn a positive return, while also being mindful of the FGN’s cost of borrowing,” stated Agusto Ratings in a note.

CardinalStone Partners Limited, in its 2024 outlook, echoed the sentiment, noting that the CBN’s guidance and communication signals a sustained tightening stance in the first half of 2024, pointing towards higher fixed-income yields, which is considered a positive development for banks.

The CBN’s commitment to curbing the 18-year high inflation rate led to increased interest rates in 2023, impacting banks’ interest income and expense. However, analysts highlighted that the net effect of rising interest rates was positive, as the advantages from higher asset yields, combined with a larger interest-earning assets base, outweighed the challenges posed by higher cost-of-funds.

As the CBN continues to communicate a sustained tightening posture in the first half of 2024, the anticipation is for increased fixed-income yields, presenting favorable conditions for banks. This proactive approach aims to address inflation concerns and maintain a delicate balance between positive returns for long-term savers and the federal government’s borrowing costs.