Nigeria's Central Bank has taken a decisive step to combat rising inflation by increasing the benchmark interest rate to 27.5%. The monetary policy committee (MPC) unanimously agreed to raise the rate by 25 basis points in its final meeting of the year, citing renewed inflationary pressures as the primary motivator.

The rate hike comes on the heels of Nigeria's economy accelerating more than expected in Q3 2024, with GDP growth reaching 3.46%. However, the country's headline inflation quickened to 33.8% in October, driven by a hike in fuel prices and floods in food-producing areas that affected consumer prices. Most economists surveyed by TechCabal had predicted a 25 basis point increase.

The new interest rate hike could have a positive impact on the net interest income of Nigerian banks. The country's four largest banks – Guaranty Trust Holding Co., Zenith Bank Plc, United Bank for Africa Plc, and FBN Holdings Plc – have all reported that net interest income had more than doubled. However, analysts warn that the rate hike could also lead to an increase in loan default rates, thereby impacting the non-performing loans ratio.

Despite the aggressive rate hikes, analysts caution that Nigeria's inflation fight may not be won without complementary fiscal efforts. "To put inflation to bed for good, the government needs to step up and reduce the structural vulnerabilities that have brought about inflation spikes. If that doesn't happen, CBN is simply swimming against the tide, and the inflation fight will have no end in sight," said David Omojomolo, Africa economist at London-based Capital Economics.

The MPC has lifted the benchmark rate by 9 percentage points since the start of the year to combat inflation. While the rate hike may provide some relief, it is clear that a more comprehensive approach is needed to address the underlying structural issues driving inflation. As the country navigates its economic challenges, it remains to be seen whether the government will take the necessary steps to support the Central Bank's efforts and bring inflation under control.

In the meantime, the impact of the rate hike will be closely watched, particularly in the banking sector. With net interest income expected to receive a boost, banks may be able to capitalize on the opportunity. However, the potential risks associated with loan default rates cannot be ignored. As Nigeria's economy continues to evolve, it is essential to monitor the effects of the rate hike and assess the government's response to the country's inflation challenges.