Sovereign Analysis /

Nigerian central bank strikes orthodox tone but larger policy overhaul is needed

  • The CBN hiked its policy rate by 150bps to 15.5% vs. expectations of a 50bps hike and raised its CRR by 500bps to 32.5%

  • Governor Emefiele struck a relatively hawkish/orthodox tone after long subordinating the price stability mandate

  • Transmission mechanism still weak and no hint of shift in distortionary FX policy, so larger policy overhaul is needed

Nigerian central bank strikes orthodox tone but larger policy overhaul is needed
Janet Ogabi
Janet Ogabi

Senior Research Analyst

Tellimer Research
28 September 2022
Published byTellimer Research

The Central Bank of Nigeria (CBN) hiked its policy rate by 150bps to 15.5%, surpassing the median 14.5% projection among the 12 analysts surveyed by Bloomberg (with two projecting a 100bps hike, six projecting a 50bps hike and four projecting no hike at all). This marks the third consecutive meeting that the CBN has hiked rates above consensus expectations (see related reading below). The decision to hike was unanimous, with 10 monetary policy committee (MPC) members voting for the 150bps hike, one voting for 100bps and one for 50bps. It also raised its cash reserve ratio (CRR) by 500bps to 32.5%.

In the post-MPC conference, Governor Emefiele struck a surprisingly hawkish and orthodox tone. With inflation rising from 19.6% to 20.5% yoy in August, Emefiele said that holding the policy rate was not an option, citing “the primacy of its price and monetary stability mandate.” He said that holding rates would further widen Nigeria’s negative real interest rate gap given rising domestic inflation and aggressive policy tightening in developed markets, putting pressure on the exchange rate and capital flows and retarding growth over the longer term by eroding purchasing power.

Interest rates

Emefiele also hinted at the possibility of further hikes at future meetings, saying that the policy rate must rise above inflation to put downward pressure on inflation. The real policy rate is -5% after today’s hike, which compares with a -2.6% median across our sample of 66 emerging markets. After holding its policy rate at 11.5% for 18 months through March, the CBN has since hiked by 400bps, in line with the median 375bps of hikes across our EM sample since the end of 2020. Since initially falling behind the curve relative to domestic inflation and its EM peers, the CBN has now caught up significantly.

This apparent shift towards hawkishness/orthodoxy, while belated, is welcome. However, the monetary transmission mechanism remains weak. Although government yields have continued to tick up in the primary and secondary markets, T-bill yields are still in single digits and the bond curve is relatively flat, at 12-14%, resulting in real rates that are sharply negative across the curve. It will be important to see whether or not yesterday’s hawkish shift in rhetoric from Emefiele translates to increased yields in the primary and secondary markets or if the rate hike will be more symbolic in nature.


On the demand side, the weak transmission mechanism stems from an excess of demand for T-bills that has persisted ever since the bifurcation of the OMO and NTB market in October 2019. The CBN’s use of weekly CRR debits above the stipulated 27.5% (now 32.5%) threshold, which is already c25pp above the global median, has also forced banks to park their available cash in government securities to avoid an erosion of their interest income. This pushed the effective CRR to 36% even before yesterday’s CRR hike, helping to mop up liquidity but also artificially reducing government yields.

On the supply side, excess liquidity has been exacerbated by the CBN’s direct interventions in the credit market and its continued monetisation of the budget deficit via 'ways & means' advances, which reached NGN3.15tn (1.7% of rolling 12-month GDP and 40% of the budgeted 2022 deficit) over the first seven months of 2022. Emefiele said the CBN would reduce its direct credit extension moving forward in a bid to eventually halt its quasi-fiscal activities, which would be a major step towards restoring Nigeria’s monetary transmission mechanism and improving the efficiency of credit allocation in the economy, but, in the meantime, will continue to put pressure on the currency and prices and distort the CBN's policies.


While Emefiele said that he was hopeful that FX sales will shift away from CBN towards the I&E window and that the CBN can clear the backlog of FX owed to airlines (which dropped from US$464m in July to US$199m in August), there wasn’t any evidence of a shift in the CBN’s currency management strategy. NGN has recently begun to depreciate in the official I&E window, reaching 438/US$ from the 415-420/US$ rate that prevailed in H1, which could signal an attempt by the CBN to gradually converge towards the 465/US$ rate that it uses to sell FX to priority sectors under its secondary market intervention sales (SMIS) mechanism.

However, NGN has continued to depreciate in the parallel market amid persistent supply shortages (see here for a more complete explanation of the driving factors), falling to 725/US$, after stabilising at 700/US$ during August. This has pushed the parallel market premium to 66%, surpassed only by the 77% premium recorded before the mid-2016 devaluation. Modest depreciation in the I&E window, therefore, will do little to clear the imbalances in Nigeria’s FX market, with a major devaluation needed to balance supply and demand (NDFs are pricing in a 20% devaluation over the next 12 months, for context).

Exchange rate

Unfortunately, we still don’t think FX liberalisation is on the table before the February 2023 elections given the strong preference of both Governor Emefiele and President Buhari for exchange rate stability. However, after the election, there could be a shift in the government stance on FX policy, with the opposition PDP’s presidential candidate Atiku Abubakar saying in a recent speech to the Lagos Chamber of Commerce and Industry that “We will push for a foreign exchange policy that encourages capital inflows and makes capital outflows less attractive to investors” (although a recent poll shows him trailing with 9% of decided voters versus 16% for the ruling APC’s Bola Tinubu and a surprising 72% for third-party candidate Peter Obi). While Emefiele’s term runs through May 2024, political resistance to his unorthodox policies could help catalyse the long-awaited shift.

Overall, we are encouraged by the hawkish shift by the CBN over the past six months and by Emefiele’s more orthodox rhetoric in yesterday’s press briefing. However, there is still a long way to go to rehabilitate Nigeria’s monetary transmission mechanism and we still don’t think that genuine FX liberalisation is on the table, which will continue to be a major impediment to growth and macro stability until the election in February, at the earliest.

After subordinating price stability to exchange rate stability and growth throughout his eight-year tenure, yesterday’s press conference could signal Emefiele’s acceptance that the status quo is no longer sustainable. However, it will take a long time to undo the harm that he has done to the CBN’s credibility, and it remains to be seen if yesterday’s rhetoric is an aberration or a signal of a bona fide policy shift at the central bank.

Related reading

Nigeria: The Factors driving the Naira’s collapse on the parallel market, July 2022

Nigerian central bank surprises with another rate hike, July 2022

Nigeria: Upgrade to Buy after excessive sell-off, June 2022

Nigerian central bank surprises with symbolic 150bps rate hike, May 2022 (Curran, Ogunkoya & Omole)

Nigeria annual macro overview: The song remains the same, February 2022 (Curran and Malik)

Nigeria: Stealth devaluation possibly underway, November 2021 (Curran, Ogunkoya & Omole)

Nigeria: FX overhaul promised post-Dangote refinery, October 2021

Nigeria: Ban of abokiFX furthers FX folly, September 2021

Central Bank of Nigeria adds fuel to the fire by banning BDCs, July 2021 (Curran & Ogunkoya)

Stagflation will continue without major policy shift, July 2021

Central Bank of Nigeria makes dovish shift and affirms FX unification, May 2021

Nigeria: Another meaningless naira devaluation, May 2021

Our discussion with Nigeria’s IMF Mission Chief, April 2021

Nigeria policy rate and FX regime left intact, March 2021

Nigeria devalues official exchange rate, but impact will be limited, March 2021