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) raised the rate by 25 basis points in its final meeting of the year, citing renewed inflationary pressures as the primary reason for the hike.

The decision comes on the heels of Nigeria's economy accelerating more than expected in Q3 2024, with a GDP growth rate of 3.46%. The services sector was the primary driver of this growth. However, the country's headline inflation rate quickened to 33.8% in October, largely due to a hike in fuel prices and floods in food-producing areas that affected consumer prices.

The MPC has raised the benchmark rate by 8.75% percentage points since the start of the year to address inflation concerns. Most economists surveyed by TechCabal predicted a 25 basis point increase, indicating that the move was largely anticipated by market analysts.

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 their net interest income has 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. Samuel Onyekanmi, an analyst at Norrenberger, expressed concerns that the higher interest rate could exacerbate loan defaults.

Furthermore, experts argue that Nigeria's aggressive rate hikes without complementary fiscal efforts may not be enough to effectively combat inflation. David Omojomolo, Africa economist at London-based Capital Economics, emphasized the need for the government to address structural vulnerabilities that contribute to inflation spikes. "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," Omojomolo said.

The Central Bank's decision highlights the ongoing struggle to balance economic growth with inflation control in Nigeria. As the country navigates these complex economic challenges, the implications of this rate hike will be closely watched by investors, businesses, and policymakers alike.