The Nigerian naira showed positive movement in the official foreign exchange market but faced continued pressure in the black market, following the Central Bank of Nigeria’s (CBN) recent interest rate hike.
Official Market Performance: On Tuesday, the naira strengthened against the US dollar in the official market, according to data from FMDQ. The exchange rate improved from N1,675.62/$ on Monday to N1,659.44/$. This move reflects the impact of the CBN’s hawkish monetary policy stance aimed at stabilizing the currency.
Black Market Trends: Despite the official market’s strength, the naira remained under pressure in Nigeria’s unofficial (black) market. On Wednesday morning, the currency traded at N1,750/$ in major cities, indicating a significant gap between the official and black market rates.
CBN’s Monetary Policy Tightening: In a bid to curb inflation and enhance the naira’s stability, the Monetary Policy Committee (MPC) of the CBN raised the Monetary Policy Rate (MPR) by 25 basis points, from 27.25% to 27.50%. Additionally, the Cash Reserve Ratio (CRR) was maintained at 50% for deposit money banks and 16% for merchant banks.
CBN Governor Yemi Cardoso highlighted that the central bank’s primary goal is to preserve the stability of the naira, which is crucial for fostering an environment conducive to economic planning and investment. He pointed out that despite domestic inflationary challenges and global economic uncertainties, the naira has remained relatively stable since June 2024.
CBN’s Measures to Enhance FX Trading: To further improve the transparency and efficiency of Nigeria’s foreign exchange market, the CBN announced plans to automate FX trading through the Bloomberg BMatch platform. Starting on December 2, 2024, all authorized dealers will begin using this electronic foreign exchange matching system (EFEMS). The move aims to streamline trading operations, increase price discovery, and enhance market integrity, ultimately improving the FX market’s operational efficiency.
Global Economic Influences: The US dollar also exerted influence on the naira and other currencies globally. The dollar strengthened following announcements from President-elect Donald Trump, who introduced new tariff plans, including a 25% additional tariff on Canadian and Mexican imports, and a 10% increase on Chinese goods. The US Dollar Index, which measures the dollar’s strength against other major currencies, hovered between 106-107 points during Wednesday’s trading, driven by solid US economic data and the Federal Reserve’s less dovish stance.
As UBS predicted, the Fed is expected to reduce interest rates by 25 basis points in December 2024, with further rate cuts expected through 2025. The robust US economy, coupled with softening labor market conditions and weaker global demand in manufacturing, continues to support the dollar’s strength.
Despite the CBN’s efforts to stabilize the naira, global economic factors, along with domestic policy measures, are likely to continue impacting the currency’s performance in the coming months.
