Central Bank of Nigeria Governor Olayemi Cardoso said the 4-percentage-point increase to 22.75% was needed as previous rate hikes had not cooled price pressures enough.
Inflation has reached almost 30%, its highest in almost three decades, driven by a steep fall in the naira currency, the removal of a fuel subsidy, fiscal deficits and conflict in food-producing parts of Africa's most populous nation and biggest economy.
Labor unions protesting on Tuesday said two of President Bola Tinubu's key reforms - allowing the naira to devalue twice in less than a year and scrapping the fuel subsidy - were making people's lives a misery.
"We are suffering in Nigeria. It was not like this before. There is real hunger," said fashion designer Surijadeen Idayat at a protest in the capital Abuja.
A protestor holds a placard during a protest in Abuja on February 27, 2024.
In a sign of the desperation, a deadly stampede broke out at a food distribution site on Friday, authorities said.
"This was not the situation a year ago. I have to cut down the number of meals in the family," said Ibrahim Mamuda, a 56-year-old resident of the northern city of Kano who said he has twelve children and that they are only eating one meal a day.
Tinubu has defended his bold but unpopular reforms, which he hopes will help him double Nigeria's growth rate to 6% annually from roughly 3% now.
The mammoth rate hike brings Nigeria closer to Ghana, which defaulted on its debts in 2022 and cut interest rates from 30% to 29% in January.
Nigeria's international dollar bonds initially rose as much as 0.5 cents on the dollar as Cardoso spoke, before falling to again trade below their previous closing price.
Capital Economics analyst David Omojomolo said Cardoso had "stepped up to the plate" by showing greater appetite to tackle Nigeria's inflation problem than the central bank had done previously.
But he said further inflation surprises or naira weakness could force another hike.