USD/NGN: What’s ahead for the vulnerable Nigerian naira?

on May 21, 2024
  • The Nigerian naira crashed to 1,520 on Tuesday.
  • The Central Bank of Nigeria delivered its eleventh rate hike.
  • Analysts believe that the rate hiking cycle is about to end.

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The Nigerian naira continued its downward trend even after the Central Bank of Nigeria (CBN) delivered a bigger interest rate hike than expected. The official USD/NGN exchange rate rose to 1,520 as it neared the year-to-date high of 1,630.

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CBN rate hike

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In a statement, the CBN decided to hike interest rates for the eleventh straight meeting. It hiked the borrowing rates from 24.75% to 26.25%, higher than the median estimate of 25.75%. This increase was a sign that the bank is concerned about inflation in the country.

The most recent data revealed that the headline Consumer Price Index (CPI) rose to 33.69% in April from 33.2% in March. Unlike other countries, inflation has been in an uptrend from its 2019 low of 10%. 

Inflation accelerated last year after the new president, Bola Tinubu, announced major reforms such as ending the popular petroleum subsidy. Most economists believe that this is the right policy since it will help reduce deficits. 

Before that, the government was spending billions of dollars each year to subsidise consumption. The government also devalued its currency two times in a bid to attract foreign investors and boost investor confidence. 

CBN’s actions to save the Nigerian naira

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The CBN has taken additional measures to boost the Nigerian naira. For example, it has cleared the substantial forex backlog and provided over $100 million in interventions. These interventions worked briefly earlier this year, leading to a 30% increase in the naira. 

Recently, however, the currency has plunged as the economy has continued to deteriorate. More foreign companies like GSK, Procter & Gamble, Sanofi, and Stone Industries have decided to leave Nigeria. In a statement, Bloomberg’s Yvonne Mhango said:

“Interest rates are now approaching their peak, with the rhetoric from policymakers suggesting a belief they are winning the fight against price gains. Looking ahead, we expect another a rate hike — the last of this hiking cycle — in July, at which point inflation is likely to have started slowing.”

Still, there is a likelihood that the Nigerian naira’s plunge is nearing its end. Technically, the USD/NGN pair could rise to its highest point this year, forming a double-top pattern that is usually followed by a big dip.

Nigerian naira

USD/NGN daily chart

At the same time, there are signs that Nigeria’s inflation growth will start to ease in the second half of the year. Most notably, rate cuts by the Federal Reserve, European Central Bank, and the Bank of England are expected to start cutting rates soon. These cuts will likely lead to more demand for emerging market currencies.

We have seen this trend start happening in Africa. The Kenyan shilling has surged by over 20% against the US dollar, making it one of the best-performing currencies in the world. Other currencies like the South African rand and the Ugandan shilling have surged.