CBN Maintains High Interest Rates to Discourage Speculation, Analyst Says

Olayemi Cardoso, The Governor of the Central Bank of Nigeria (CBN). Image Credit: CBN

January 22, 2025

By InvestAdvocate

Lagos (INVESTADVOCATE)

In a strategic move to stabilize the economy and deter currency speculation, the Central Bank of Nigeria (CBN) has upheld elevated interest rates, presenting significant opportunities for local investors. Economic analysts argue that the policy, while costly to sustain, offers attractive yields on fixed-income securities and reinforces foreign investment inflows.

To combat inflationary pressure, the Central Bank of Nigeria (CBN) has applied a very aggressive monetary tightening measure by raising benchmark interest rate which was last recorded at 27.50 percent in November 2024, leaving many corporate organizations in dire straits. Interest rate averaged 12.57 percent from 2007 until 2024, reaching an all time high of 27.50 percent in November, 2024 and a record low of 6 percent in July of 2009.

Delivering a comprehensive macroeconomic review for 2025 at the Finance Correspondents Association of Nigeria (FICAN) quarterly forum, Mr. Ugodre Obi-Chukwu, Managing Director of Nairametrics, explained highlighted the rationale behind the CBN’s approach. By maintaining interest rates above 20%, the central bank effectively eliminates the appeal of speculative investments in foreign currencies, ensuring that local assets remain lucrative for investors.

“Investors with surplus funds should consider locking in treasury bills and fixed-income securities now,” advised a prominent economist. “With yields currently between 24% and 26%, this may be the best opportunity in years. Rates are projected to decline by March, making January and February critical months for such investments,” Obi-Chukwu explained in his presentation titled “Nigeria in Transition: Reforms, Global Shifts, and Strategic Opportunities.”

According to him, the elevated interest rates not only attract domestic participation but also create a competitive edge for Nigeria in the global capital markets. The economic analyst compared the returns on treasury bills to speculative currency trades, emphasizing parity in potential gains.

“For instance, investing ₦1 million in treasury bills at a 20% rate yields ₦1.2 million annually. This matches the returns of speculative dollar investments if the naira depreciates moderately. It underscores why the CBN’s policy is effective in curbing speculative demand for dollars,” the Nairametrics boss explained.

High interest rates also bolster Nigeria’s appeal to foreign investors seeking superior returns on portfolio investments. This influx is critical in meeting the country’s FX requirements, which the analyst estimated at $100 billion annually.

“Foreign capital inflows thrive when domestic interest rates are high, especially if U.S. rates decline. This dynamic could catalyze much-needed foreign portfolio investments and foreign direct investments,” the economist noted.

However, he cautioned that the current high rates are unsustainable in the long term due to their economic cost. As rates are expected to decrease from March, analysts urge individuals and institutions to seize this fleeting window of opportunity.

“Juicy rates like these might not reappear for another five years,” an analyst predicted. “Invest now to maximize returns before the monetary policy cycle shifts.”

The CBN’s monetary strategy reflects a delicate balancing act between curbing inflation, stabilizing the naira, and attracting foreign investment. While the policy places short-term pressure on the economy, it underscores Nigeria’s commitment to creating a conducive environment for growth.

As Nigeria navigates the complexities of its macroeconomic landscape, the central bank’s measures signal a proactive approach to safeguarding the nation’s financial stability while presenting lucrative opportunities for savvy investors.

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