Projected Nigeria interest rate in 5 years: Outsized hikes suggest CBN is no mood to countenance raging inflation
Interest rates in Nigeria are not expected to come down in the near term as price pressures continue to rage in the West African nations.
The latest inflation report revealed that headline inflation in Nigeria accelerated to a fresh 17-year high in September.
Moreover, the Central Bank of Nigeria (CBN) said last month that inflation is expected to continue on its upward trajectory due to the upcoming 2023 general elections, which are expected to lead to increased spending.
How high will interest rates in Nigeria go? Let’s learn about the CBN, inflation rates in Nigeria and the rate hike outlook below.
What is the CBN?
The Central Bank of Nigeria is the principal bank of Nigeria. The objectives of the CBN are to ensure monetary and price stability in the country, to issue the Nigerian Naira (NGN) and to maintain foreign currency reserves, among others.
A body known as the Monetary Policy Committee (MPC) is responsible for formulating monetary and credit policy in Nigeria. The MPC uses the monetary policy rate (MPR) – the rate at which the CBN lends to commercial banks – as its primary tool to anchor other bank interest rates in Nigeria. Additionally, the CBN also carries out open market operations to manage liquidity in the country’s financial system.
The CBN conducts a two-day monetary policy meeting six times a year held every alternate month.
What is your sentiment on Oil - Brent?
Nigerian interest rate history
Interest rates in Nigeria were accommodative for the majority of the past three years, as the CBN has aimed to strike a balance between controlling inflation and maintaining growth when making policy decisions on Nigerian interest rates.
Historical data showed the CBN maintained a MPR of 13.5% for the last 10 months of 2019. The onset of the Covid-19 pandemic pushed the Nigerian central bank to start cutting rates from May 2020 in order to support economic growth amid global lockdowns.
The CBN implemented two rate cuts in 2020, as it took the MPR down to 11.5% by December 2020 from 13.5% at the start of the year.
The central bank maintained the MPR at 11.5% throughout 2021 as it continued to support economic recovery while keeping an eye on rising inflation and growing domestic public debt.
The Nigerian central bank then kicked off its first rate hike cycle in nearly six years in May 2022 after the annual inflation rate in the West African nation accelerated to 17.7% during the month.
CBN interest rates increased by 150 basis points (bps) from 11.5% to 13% in May 2022. The central bank hiked the benchmark interest rate in the following MPC meeting in July 2022, taking it to 14%.
In late-September 2022, the CBN completed a hattrick of rate hikes as it took the MPR up to 15%.
The CBN is scheduled to meet for its final monetary policy meeting of the year on 21 November 2022.
Latest news: CBN hikes rates by 150 bps in September
September 2022 saw the CBN double down on its ultra-hawkish stance as the Nigerian central bank implemented its second 150 bps rate hike in five months.
The central bank said it was concerned about “persisting” inflation pressures in the country having seen its annualised inflation rate rise to a fresh 17-year high in September 2022.
The consumer price index (CPI) report published by Nigeria’s National Bureau of Statistics showed headline inflation accelerated 20.8% on a year-on-year basis in September, compared to 20.5% in August.
Average headline inflation for the twelve months ended September 2022 came in at 17.4%. Increased food prices, higher factory production costs and rising import expenses were the primary drivers of inflation.
“At this Meeting, the option to loosen the policy rate was not considered as this would be gravely detrimental to reining-in inflation. The Committee thus, agreed unanimously to raise the policy rate to narrow the negative real interest rate gap and rein-in inflation,” the CBN said in its September monetary policy meeting.
The depreciation of the Nigerian naira was another pressing concern for the CBN. Imports of essential goods such as fuel and food have become more expensive due to the lower NGN/USD exchange rates.
On 18 October 2022, NGN was trading at record low levels of 0.002256 against the USD and was on track to see four straight months of losses in October against the greenback.
“The ongoing monetary policy tightening by the US Federal Reserve Bank is also putting upward pressure on local currencies across the world, with pass-through to domestic prices, as investors exit these economies to seek higher yields in US dollar denominated fixed income securities,” the CBN said in September.
The Nigerian central bank added that it “felt that an aggressive rate hike would slow capital outflows and likely attract capital inflows and appreciate the naira.”
Pierre-Olivier Gourinchas, director of research of the International Monetary Fund (IMF), said the following about the risks of under-tightening and over-tightening of interest rates:
In terms of economic growth, the CBN said that output growth is expected to continue for the rest of 2022 but at a “much-subdued pace”.
According to the CBN’s projections, the Nigerian economy could grow by 3.5% in 2022. The IMF projected Nigeria’s economy to grow by 3.2% in 2022.
Notably, oil and gas are critical to the Nigerian economy, with oil accounting for around 40% of Nigeria’s GDP and 80% of foreign exchange earnings. Nigeria’s dependence on oil is considerably larger than that of most other significant oil-producing nations.
Conversely, this means that fluctuations in the price of oil and oil production levels are a significant factor determining the health of the Nigerian economy, the level of foreign reserves, as well as the value of the national currency. Interest rate hikes have negatively affected oil prices in the past several months as global markets anticipate recessions – and drops in demand – in the world’s developed economies.
Interest rate outlook: Projected nigeria interest rate in 5 years
For the near-term and long-term, the pace and intensity of future rate hikes in Nigeria could be heavily dependent on inflation. The CBN is widely expected to extend its rate hike cycle, as data indicated that inflation rates in Nigeria have not fallen off peak level.
The central bank said in September 2022 that it expected inflation to maintain its current upward trend due to the approaching 2023 general election, which is expected to drive increased spending and higher demand for money.
“In light of the persisting pressures on inflation, the Committee encouraged the Bank maintain a close watch on the inflationary implications of the interventions,” read the September monetary policy meeting statement.
The IMF also expected inflation in Nigeria to remain at elevated levels. The IMF forecast inflation in the African nation to come in at 19% in 2022 before falling to 17% in 2023.
Meanwhile, research firm Fitch Ratings said central banks in frontier-market economies like Nigeria have “little choice but to continue to increase their interest rates” due to weak currencies and rampant inflation.”
Data aggregator TradingEconomics expected Nigerian interest rates to trend around 16% in 2023 and 13% in 2024. TradingEconomics did not share its projected Nigeria interest rate in 5 years’ time.
The bottom line
Forecasting inflation rates and interest rates is a challenging task due to the unknowns of the future.
This was best displayed in 2022 when the start of the war in Ukraine threw a spanner in the works of the “transitory inflation” narrative that central banks across the world were hoping to realise. Today central banks across the world are scurrying to clamp down on runaway inflation with larger-than-expected rate hikes which were not anticipated a year ago.
Therefore, it is important to note that Nigerian inflation rate forecasts and Nigerian interest rate outlook from analysts and experts can be wrong.
Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size, and goals. And never trade money that you cannot afford to lose.
FAQs
What is the present interest rate in Nigeria?
The CBN hiked rates by 150 bps in its September monetary policy meeting to take the monetary policy rate (MPR) – Nigeria’s benchmark interest rate – to 15.5%.
What was the highest interest rate in Nigeria?
According to historical data compiled by TradingEconomics, the interest rate in Nigeria of 15.5%, as of mid-October 2022, is currently the highest in over a decade.
Which bank in Nigeria has the highest interest rate for 2022?
The CBN uses the MPR – the rate at which the CBN lends to commercial banks – as its primary tool to anchor other bank interest rates in Nigeria. The MPR stands at 15.5%, as of mid-October 2022, and other banks set their lending and savings rates accordingly. Due to the dynamic nature of the economy, the elevated benchmark interest rate and rampant inflation, it is difficult to say which bank in Nigeria will have the highest interest rate in 2022.
You should always do your own research before making an investment decision. And never invest or trade more than you can afford to lose.
Markets in this article
Related topics
