Analysts Forecast Rate Increase as Naira Depreciates Sharply

As the Nigerian naira experiences a sharp depreciation against major currencies, financial analysts are predicting that the Monetary Policy Committee (MPC) will opt for another interest rate hike to address the country’s economic challenges.

The recent slump in the naira, coupled with a 28-year high inflation rate, has raised concerns among economists, prompting expectations of further tightening measures.

Since mid-April, the naira has witnessed a significant decline, falling by 28% against the US dollar over the past four weeks.

This rapid depreciation has been exacerbated by President Bola Tinubu’s decision to relax foreign-exchange controls last June.

In response to the economic turmoil, the MPC raised interest rates by 6 percentage points in the first quarter, bringing the benchmark rate to 24.75%.

However, with inflation soaring to 33.7% last month—well above the central bank’s target range of 9%—analysts believe that additional rate hikes may be necessary to curb rising prices and stabilize the currency.

Giulia Pellegrin, a senior portfolio manager at Allianz Global Investors, highlighted the need for proactive measures, stating, “The committee will likely be watching recent currency volatility and may decide more action is needed.”

She emphasized the importance of tightening monetary policy to restore investor confidence and ensure price stability.

Yvonne Mhango, an economist at Bloomberg Africa, echoed similar sentiments, noting that the naira’s depreciation necessitates “additional and sizeable rate hikes.”

Mhango emphasized the significance of maintaining positive real interest rates to combat inflationary pressures effectively.

Investors are eagerly awaiting the MPC’s decision, with many expecting another interest rate increase at the upcoming meeting on May 21.

Ayodeji Dawodu, director of fixed income at BancTrust & Co., stressed the importance of transparency and intervention in the currency market to restore stability.

“Investors also want Cardoso to announce more liquidity-tightening measures and introduce greater transparency in the currency market,” Dawodu remarked.

Despite recent declines in liquid reserves, analysts remain hopeful that decisive action from the central bank will help alleviate concerns about the quality of reserves and bolster confidence in the economy.

As Nigeria navigates through turbulent economic waters, all eyes are on the MPC’s decision and its potential implications for the country’s financial landscape.