The Central Bank of Nigeria (CBN) has raised the benchmark interest rate by 25 basis points to 27.5% during its final Monetary Policy Committee (MPC) meeting of 2024. This marks an aggressive monetary tightening cycle, with the rate increasing by a total of 8.75 percentage points this year in a bid to curb inflation.
Inflation Drives Policy Decisions
CBN Governor Olayemi Cardoso cited renewed inflationary pressures as the primary factor influencing the rate hike. “The considerations of the meeting were held on the backdrop of renewed inflationary pressures as the headline food and core measures rose year on year in October 2024. Members therefore agreed unanimously to remain focused on addressing price developments,” Cardoso said at a media briefing.
Headline inflation reached 33.8% in October, driven by rising fuel prices and food supply disruptions caused by flooding in key agricultural areas.
Economic Growth Amid Challenges
Despite the inflationary backdrop, Nigeria’s economy grew by 3.46% in Q3 2024, exceeding expectations. The services sector played a pivotal role in driving this growth. However, analysts caution that unchecked inflation could undermine these economic gains.
Implications for the Banking Sector
The rate hike is expected to impact Nigerian banks in two significant ways:
- Increased Net Interest Income: Higher rates typically boost banks’ net interest income. The four largest banks—Guaranty Trust Holding Co., Zenith Bank Plc, United Bank for Africa Plc, and FBN Holdings Plc—have already reported a doubling of net interest income.
- Rising Loan Defaults: Analysts warn that higher borrowing costs could increase loan default rates, leading to a rise in non-performing loans (NPLs).
“[The hike] could lead to an increase in the loan default rate, thereby impacting the non-performing loans ratio,” noted Samuel Onyekanmi, an analyst at Norrenberger.
Analysts Call for Complementary Fiscal Measures
While the CBN’s rate hikes signal a strong commitment to fighting inflation, experts argue that monetary policy alone may not be sufficient.
“To put inflation to bed for good, the government needs to step up and reduce the structural vulnerabilities that have brought about inflation spikes. If that doesn’t happen, CBN is simply swimming against the tide, and the inflation fight will have no end in sight,” said David Omojomolo, Africa economist at London-based Capital Economics.
Outlook
The interest rate hike underscores the CBN’s determination to stabilize prices but highlights the limitations of monetary policy in addressing structural challenges. Without complementary fiscal efforts, including infrastructure improvements and policies to reduce food supply disruptions, inflationary pressures may persist into 2025.
As Nigeria heads into the new year, balancing economic growth and inflation control remains a pressing challenge for policymakers.