The Monetary Policy Committee (“MPC” or “the Committee”) of the Central Bank of Nigeria (CBN) faced a stark choice at its third meeting of the year. The backdrop of soaring inflation and a highly volatile naira, which had depreciated by 21.3% since mid-April 2024, left the Committee with two realistic options: to hold or to hike the policy rate. In keeping with its commitment to return to monetary policy orthodoxy with a shift to a focus on price stability, the MPC opted for a third consecutive interest rate hike, of 150 basis points (bps), to a record high of 26.25% in response to the continued rise in inflation, which hit a 28-year high of 33.7% in April 2024. The MPC’s move was largely in line with our expectations as we believe that a bold policy move was required to bring real interest rates closer to positive territory and halt the naira’s recent decline.

Cost-Push Culprits

Fuelled by higher food and energy costs, as well as continued currency weakness, inflation has persisted on an upward trajectory. According to Governor Cardoso of the CBN, “the balance of risks suggests further tightening of policy to build on the benefits from previous hikes”. This statement clearly indicates that the CBN intends to keep interest rates elevated for as long as necessary to tame inflation. Echoing widespread concerns, during the post-meeting press briefing, the CBN Governor acknowledged that cost-push factors, particularly rising food prices are a key culprit behind the nation’s inflation woes. He outlined a series of factors fuelling this acceleration. These included the surge in logistics costs for agricultural products, ongoing security challenges in key food-producing regions, infrastructure bottlenecks, and the impact of a weaker naira on the price of imported food items.