On Tuesday, the Central Bank of Nigeria raised the Monetary Policy Rate (MPR) by 200 basis points to 14 percent, in an attempt to attract more investment and stem rising inflation.

Last month, Nigeria abandoned its 16-month-old Dollar peg, allowing the Naira trade freely in a bid lure foreign investors who fled both the equities and bond markets in light of the plunge in crude oil prices. However, the local currency has plummeted  and the Dollar supply has dried up in both foreign exchange and interbank markets. Having exhausted their options, the Central Bank of Nigeria made the decision to raise the interest rate to attract foreign investors to the potential detriment of economic growth. Faced with the choice to spur growth by cutting rates or tackle galloping inflation, five out of eight members of the monetary policy committee opted for a rate increase, Central Bank Governor, Godwin Emefiele, told reporters. With the government borrowing at 17 percent and the CBN’s benchmark rate at 14 percent, that gives foreign investors incentive to consider returning to Nigeria. “We took a lot of time to deliberate on whether to favour growth against inflation,” he said. “Members were of the view that an upward adjustment of interest rates would strongly signal not only the bank’s commitment to price stability…but also its desire to gradually achieve positive real interest rates.”

The decade-high inflation rate of 16.5 percent was nearly twice the upper CBN policy reference band and had culminated in negative real interest rates. The negative real interest rates go against the recent flexible foreign exchange market and foreign investors remain unwilling to bring in new capital under the circumstances.Given that the county’s inflationary pressures emanate from foreign exchange related issues and higher energy costs rather than excess liquidity in the economy the interest rate hike may be ineffective in combatting inflation directly. The increment may however encourage foreign investors to pump hard currency into the system, increasing liquidity, thus reducing pressure on the naira and inflation.The Naira, which has been allowed to trade more freely over the past week, has touched record lows of around 312 per dollar.

Fund managers express cautious optimism over the decision by the monetary policy committee. “This is very positive, but they still have some way to go,” said Kevin Daly, a member of the investment committee at Aberdeen Asset Management in London. “We are not ready to go back yet but it’s starting to get more interesting.”