The naira recorded its best daily gains since March against the dollar due to increased inflows from the Central Bank of Nigeria (CBN). The CBN is also expected to raise interest rates again to support the naira and control inflation at a nearly three-decade high.
According to FMDQ data, the naira gained almost N100/$, trading at N1,500.32 per dollar on Monday, up from N1,596.92/$ last Friday. In the black market, the naira settled at N1,570 per dollar, a smaller gain from N1,580 last Friday.
The CBN sold about $106.5 million to registered foreign exchange dealers over two days last week to stabilize the struggling foreign currency market. The CBN attributed the recent forex market fluctuations to increased business demand and the expected seasonal rise in summer.
MPC Meeting
Nigeria’s Monetary Policy Committee (MPC) will likely announce a small rate hike due to high inflation. The black market’s resistance near the N1,600/$ line indicates ongoing pressure on the naira.
At its last meeting on May 21, 2024, the MPC raised the monetary policy rate (MPR) from 24.75% to 26.25%, a 150-basis point increase. This year, the MPC has implemented three rate hikes, boosting foreign portfolio investments (FPI) but not sufficiently curbing inflation. Due to persistent high inflation, the market expects a fourth rate increase this year.
Nigeria’s Inflation Rate
Despite the CBN’s efforts to lower the consumer price index, Nigeria’s annual inflation rate remains high. Inflation rose from 33.95% in May 2024 to 34.19% in June 2024, prompting expectations of another interest rate hike on Tuesday.
Economist Andrew Matheny of Goldman Sachs Group Inc. noted, “Since the last meeting, inflation hasn’t slowed, and the naira’s value has declined again, increasing inflationary pressures. This suggests the CBN will maintain a hawkish stance.”
The naira’s decline, continuous price hikes for 18 months, and reduced purchasing power have pushed many households below the poverty line. The World Bank reports that Nigeria has the second-highest poverty rate after India, with an estimated 87 million people living below the poverty line.
Goldman Sachs urges the CBN to take more decisive action to combat inflation and improve foreign investor perceptions. Matheny stated, “An additional 50 or 100 basis points won’t significantly impact investors.”
Since February, the CBN under Governor Cardoso has increased lending rates by 750 basis points, bringing the rate to 26.25%.
