Amidst higher inflows from the CBN, the naira recorded remarkable gains compared to the haven currency, marking its highest advances since March.
To bolster the naira and moderate inflation, which is close to a three-decade high, the top bank is also prepared to boost headline interest rates one further time before halting its aggressive tightening drive.
According to data from FMDQ, the naira increased by about N100/$ on Monday, when the local currency traded for N1,500.32, a massive 640 basis points higher than the N1,596.92/$ posted on Friday.
The local currency settled at N1,570 per dollar on the black market, a well-liked platform for the general public to trade foreign exchange. This represents a rise of fewer than 100 basis points from N1,580 on Friday.
To bolster the nation’s collapsing foreign exchange market, the CBN sold about $106.5 million to authorized foreign exchange dealers over two days last week.
The top bank in Nigeria asserts that the heightened demand from corporate entities and the anticipated summer spike are the main causes of the latest volatility in the foreign exchange market.
MPC Gathering
Nigeria’s strong inflation rate means that the MPC meeting would probably result in a little rate hike. The naira is likely to encounter resistance in the vicinity of the 1,600/$ resistance line, based on the high pricing behaviour observed on the illicit market.
At its most recent meeting on May 21, 2024, the CBN’s Monetary Policy Committee (MPC) decided to raise the monetary policy rate (MPR) by 150 basis points, from 24.75% to 26.25%. Three rate hikes during the previous MPC sessions in 2024 contributed to the growth of the nation’s foreign portfolio investments (FPI) but fell short of the goal of reducing inflation.
The likelihood that the high rate of inflation will result in the Monetary Policy Rate (MPR) increasing for the fourth time this year has already been priced in by the market.
Nigeria’s inflation rate is still non-transitory and persistent
The MPC members’ decision to maintain their hawkish stance has been significantly impacted by their decision to adopt a traditional strategy of lowering inflationary pressure through the use of the interest rate instrument; nonetheless, Nigeria’s inflation has not been controlled. In June 2024, the rate of inflation increased by 0.24% to 34.19% following the most recent MPC MPR decision in May 2024.
Despite certain actions taken by the Central Bank of Nigeria (CBN) to lower the consumer price index, which has been high for 28 years, Nigeria’s annual inflation rate has remained high. Interest rates are expected to be raised on Tuesday by the Monetary Policy Committee (MPC) of the CBN due to the June inflation rate increasing from 33.95% in May 2024 to 34.19%.
Goldman Sachs analyst Andrew Matheny stated that “developments since the last meeting have been hawkish; inflation has not slowed at all. Above all, the value of the naira has fallen once more. And it is unquestionably inflationary. All of this suggests that the CBN will continue to be hawkish.”
Because of the 18th straight month of price increases, the naira’s declining value, and a loss in purchasing power, many households are now below the poverty line. According to World Bank data, the oil-rich West African country has an estimated 87 million people living below the poverty line, making it the country with the second-highest poverty rate behind India.
To reduce inflation and change foreign investors’ perceptions, Goldman is encouraging the central bank to undertake “something much bigger, much bolder, much more decisive.” As Matheny notes, “an additional 50 or 100 basis points is not going to move the needle in the eyes of an investor.”
The Cardoso-led CBN has raised lending rates by 750 basis points in total since February, bringing them to 26.25%.Â
