Nigeria’s Low-Interest Rate Threatens as FMs Battle Inflation, Taper Talk
Nigeria’s Low-Interest Rate Threatens as FMs Battle Inflation, Taper Talk
Nigeria’s low-interest rate environment threatens amidst taper talk in the United States while frontier markets (FMs) battle rising inflation rates. Consequently, expectations have shifted to possible adjustment to the monetary policy rate as frontier markets continue to tackle inflation rates with higher interest rates following an earth-shaking supply shock in 2020.
The disruption has raised price levels across the world with inflation rising in the United States, Europe and weak data from China among others. Interest rates have already risen in Angola, Armenia, Azerbaijan, Belarus, Georgia, Pakistan, Paraguay, Sri Lanka and Tajikistan, among others, Fitch said in a report.
Bond buying plan in the United States and need for dollar inflow could halt the Central Bank of Nigeria’s accommodative policy, analysts told MarketForces Africa.
It was noted that benchmark interest rate hike could however impact production costs negatively if costs of obtaining funds adjust upward. But a Lagos-based economist Tunde Akinbobola said a low interest rate is serving the interest on bellwether companies with solid balance sheet positions rather than cottage and small scale businesses.
With a wider gap between prime lending rates for banks preferred customers and ordinary businesses, funding costs now provides strategic advantages for competition. Stanbic IBTC Purchasing Manager Index shows that economy is recovering gradually, albeit slower, due to a still weak private sector investment drive in the country.
Frontier markets are using policy measures to drive inflation downward, but the CBN relies on base effect which has continued to flatter the figure against market reality.
Though there is disinflation which supports the Nigerian monetary authority’s position that supply shock is responsible for the inflation uptrend, consumer prices are relatively high when compare with the pre-pandemic period.
Questions bothering the mind is whether the monetary policy rate hike is coming. How would this impact yield in the fixed income market? It is not clear what the central bank would do but some analysts are expecting Nigeria’s benchmark interest rate to increase.
According to investment experts that spoke with MarketForces Africa, the central bank may be unable to sustain the drive for a low interest rate environment for longer due to development in the global economy that has necessitated an upward interest rate re-pricing.
Nigeria’s Low-Interest Rate Threatens as FMs Battle Inflation, Taper Talk
There is a likelihood of further outflow of funds from the country amidst taper talk in the United States, an increased inflation rate in major economies and a reported jump in the U.S. 10 year treasury yield.
CBN’s monetary policy committee maintained the status quo in its September 2021 meeting, a pro-growth stance to drive credit into the real sector of the Nigerian economy to drive growth.
After a tepid outturn in the first quarter of 2021, the Nigerian economy expanded more than 5% in the second quarter of the year as a credit to the private sector expansion. With thinner margins, local banks which have seen pressure in lending and capital market investment appear to have stabilised after the initial shockwave in the segment that resulted to lower interest income.
In what appears like a consensus and coordinated pattern, central banks in the frontier markets have stepped up their efforts to contain rising inflation caused by ongoing supply-chain disruptions, logistical issues and soaring commodity prices, as shown in Fitch Ratings’ latest ‘Frontier Vision’ chart pack.
While a number of central bankers continue to view the pick-up in inflation as short-lived, many are tightening monetary policy to reduce the risk of transitory increases becoming more permanent, Fitch said.
Interest rates have already risen in Angola, Armenia, Azerbaijan, Belarus, Georgia, Pakistan, Paraguay, Sri Lanka and Tajikistan, among others. Domestic economic activity has also recovered strongly in many FMs, including Georgia, Costa Rica and Belize, although this trend has not been uniform across all FMs.
At the same time, labour markets have had rapid annual employment growth increases in 2Q21 in many FMs, such as in Azerbaijan, Belize, Costa Rica, Georgia and Senegal.
In the United States (U.S), inflation figures moderated to 5.3% from 5.4% in July for the first time since October 2020 amidst taper tantrums. Analysts said while this buttresses the Feds view of inflationary factors being transitory, the committee hinted at a tapering of its asset purchase program soonest as against rising interest rate.
It noted that a different scenario is playing out in the Euro-zone as prices continue to overshoot sharply above target, reaching a 13-year high in August to 3.2% year on year from 2.5% in July. #Nigeria’s Low-Interest Rate Threatens as FMs Battle Inflation, Taper Talk
