By Milcah Tanimu
The naira held firm at a critical support level in Nigeria’s unofficial market, with expectations high that the Central Bank of Nigeria (CBN) will increase interest rates later today.
On Monday, the naira showed significant strength in the parallel segment of the foreign currency (FX) market, trading at N1,490 per dollar. This marked a 1.34% appreciation from Friday’s value of N1,510/$. Currency traders in Lagos quoted the buying rate at N1,460 and the selling rate at N1,490.
In the official FX market, the naira appreciated by 1.93%, trading at N1,469/$ on Monday, up from N1,497.3/$ on May 17.
Market Anticipations Ahead of MPC Meeting
As the Monetary Policy Committee (MPC) meeting takes center stage, market expectations are hawkish amid concerns over rising inflation and recent FX changes. Of 12 economists surveyed by Bloomberg, nine anticipate a 100 basis-point increase, two expect a 200 basis-point hike, and one foresees no change when Governor Olayemi Cardoso announces the MPC’s decision in Abuja on Tuesday. The MPC had previously raised rates by 6 percentage points to 24.75% in the first quarter to control inflation and stabilize the currency.
This will be the third MPC meeting under Governor Cardoso. The Monetary Policy Rate was increased by 600 basis points during the February and March sessions. In April, the food index reached 40.53%, prompting one of the most aggressive attempts to curb inflation, which surged to 33.69%.
Naira’s Performance and Economic Context
The Nigerian currency has struggled, losing most of its recent gains and becoming the world’s worst-performing currency. Since President Bola Tinubu’s administration loosened FX regulations in June, the naira has depreciated by approximately 69% against the US dollar. This has accelerated inflation, which reached 33.7% last month, more than three times the CBN’s target range of 9%.
The CBN is generally expected to maintain high rates, with some flexibility if expectations for a US interest rate hike diminish.
US Dollar Trends
The US dollar modestly strengthened as traders anticipated further signals from the Federal Reserve regarding US interest rates, while the naira displayed some resilience. Both the dollar index and dollar index futures rose by roughly 0.1% during the London trading session.
Fed officials’ remarks suggested that interest rates might remain steady for now, pending more evidence of declining inflation. This turned attention to the Fed’s late-April meeting minutes, expected on Wednesday, for more insights on rate policy. Several Fed representatives, primarily those on the rate-setting committee, are also scheduled to speak in the coming days.
The expectation of prolonged higher US rates is favorable for the dollar but negative for more volatile, high-yielding currencies. The US dollar’s surge earlier this year, driven by mid-April gains against major currencies like the Euro, Yen, Pound, and Franc, is now expected to reverse following a drop in consumer price inflation as projected.
Conclusion
As the CBN prepares to announce its decision on interest rates, the naira’s performance and inflationary trends remain critical. The potential rate hike aims to stabilize the currency and control inflation, amidst global and domestic economic pressures.
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