The USD to naira (USD/NGN) exchange rate ignored the jumbo rate hike by the Central Bank of Nigeria (CBN) this week. The official rate stands at 1,578 while the black market rate stands at 1,600. It has jumped by more than 245% from its lowest point in 2023.

The most important forex news this week came from Nigeria, where the central bank held its first monetary policy meeting since July last year. 

And was widely expected, the bank decided to deliver a jumbo rate hike as it seeks to save the plummeting naira and manage inflation.

It hiked rates from 18.75% to 22.75%, beating the analysts’ estimate of 21%. The committee also committed to deliver more hikes if needed.

This was a closely watched meeting because the central bank has not acted with the urgency that is required in the past few months. While other banks hiked rates, the bank focused on other strategies to boost the naira.

High interest rates help to support a currency by incentivising savers who are attracted to higher yields in their savings accounts.

The challenge for the Nigerian naira is that the country’s inflation remains much higher than the current interest rates. The most recent data showed that the headline Consumer Price Index (CPI) rose to 29.90% in January.

Therefore, a person who holds the naira and receives the full interest is still getting negative returns since the spread sits at 7.25%. 

Instead, a person who holds the US dollar is getting a better return since inflation in the US stands at 3.1% while the official cash rate remains at 5.50% in January. This has led to a 2.4% spread between the two.

This situation also explains why the Turkish lira has continued crashing even as the CBRT hiked rates from 18% in June to 45%. The country’s headline inflation rose to 64.90%, meaning lira holders are making a negative return. 

The other challenge for the Nigerian naira is that many companies have shifted to the US dollar for transactions. For example, many real estate companies are only quoting their projects in dollars to cushion their returns from the naira volatility. 

Most Nigerians with savings have also moved to the US dollar, triggering a major dollar shortage in the country. Higher rates in Nigeria will not solve this shortage in the country.

USD/NGN chart by TradingView

The outlook for the USD to NGN exchange rate is still bullish even as economists predict more CBN interest rate hikes. In this case, the Nigerian naira will likely rise to the important psychological level at $1,600 against the greenback. 

The challenge is that it will take a combination of various factors to solve the naira crisis. In this, Nigeria needs to import less and export more. At the same time, the government needs to attract more dollars as Egypt did when it reached a major investment deal with the United Arab Emirates (UAE). UAE will invest $35 billion in Egypt, helping to ease the dollar shortage.

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