Fed, BoE, Rates Hike to Force CBN into Hawkish Mood
Since September 2020 Nigeria has kept benchmark interest at 11.5% while the apex bank uses the cash reserve ratio to control liquidity position in the economy despite steep inflation rate.
At 15.70% in February, headline inflation is currently about two times the Central Bank of Nigeria’s 6-9% inflation targeting. But the key focus has been to grow the economy amidst the fiscal authority expansionary policy.
Like many others frontier markets that have been fighting rising inflation rates with an upward interest rates adjustment and offer investment return that is attractive to foreign investors.
Money, they say, goes to where it is treated well but Naira assets have been yielding negative as government spot rate offer trend below the headline inflation rate.
Effectively, Nigeria is paying less to compensate for the nation’s inflation position on borrow funds but the trend could reverse as leading economies are adjusting interest rates.
Competing with bellwether economies for foreign investment attraction, United States Federal Reserve, Bank of England and European Central Bank interest rates hike is expected to force Nigeria into Hawkish mood.
The Central Bank of Nigeria (CBN) currently has no appetite for a benchmark rate adjustment, a mood triggered since September 2020 following the pandemic break.
The monetary policy authority has persistently kept the benchmark interest rate at 11.5% while holding to parameters including the cash reserve ratio to control liquidity.
However, Central Banks around the world are adjusting to the rising inflation rate that has worsened spending amidst the energy crunch. European Central Bank has adjusted rates just like Federal Reserve and of course Bank of England.
This week, both Bank of England and the Federal Reserve raise the interest rate by 25 basis points. However, another 25 basis points adjustment is expected in May as Fed goes on a rampage to curb inflation stress.
Today, the Bank of England has raised its Bank Rate to 0.75% today but analysts said the tone has turned more cautious. The energy shock will accentuate both the inflation peak and its subsequent decline, according to analysts.
As was widely expected, the BoE hiked the Bank Rate by 25 basis points today to 0.75%. The committee voted 8-1 in favour of the hike with one dissenter preferring no change. This is a more dovish split than the four members voting in favour of a 50bp hike at the February meeting.
ING said in a market note that the change seems to be motivated by the war in Ukraine, which is likely to accentuate both the near-term inflation peak (to around 8% in April, and potentially even higher later this year), but also its subsequent drop.
Like in the previous meeting, the MPC said ‘some modest further tightening in monetary policy may be appropriate’ in the coming months but noted risks on both sides.
“Regarding future moves, we have a fourth hike pencilled in for May but there is a good chance of a pause after that. One reason is that active gilt sales should begin after the Bank Rate reaches 1%, arguing for a more cautious hiking process as markets deal with the unprecedented policy”, ING Economic said in a note.
“The other reason is growth. The UK economy is facing an energy shock that will dent disposable incomes. This has to be weighed against higher inflation. We expect it to peak at 8% in April. After that peak, we expect less pressure on the BoE to stay hawkish”.
“One standout is that the BoE is being far more cautious than the Fed last night. That is a reminder that the UK, like Europe, is an energy importer and more susceptible to events in Ukraine.
“With the US more exposed to demand-driven inflation, a confident Fed should keep the dollar in the ascendancy. We see a greater risk of GBP/USD trading 1.28 than 1.34 over the coming weeks”.
“Against the euro, however, GBP weakness should be more contained. This is the case because the same factors restraining BoE hawkishness will be playing out across continental Europe, too. And at least the BoE has already now delivered three hikes.
“We, therefore, see the EUR/GBP upside as more limited and do not see a strong case for it sustaining gains above the 0.8450/70 area. Indeed, focusing on a further BoE rate hike on 5 May, a time when UK CPI will be pushing to the 8% area, could see EUR/GBP trading back down to the 0.83 area”.
Uzbekistan’s central bank raises rate to 17% per annum
Uzbekistan’s central bank has raised its main interest rate from the current 14 per cent to 17 per cent to mitigate external impacts and suppress inflation, the bank said on Thursday.
The decision was taken in light of “high uncertainties and tensions in the external economic environment’’ in order to ensure macroeconomic and financial stability in the country.
It was also “to prevent the growth of devaluation and inflation expectations and maintaining savings in the national currency’’.
The bank said that increasing macroeconomic uncertainties and risks include the economic situation in Uzbekistan’s major trading partners, sharp fluctuations of their exchange rates and rising prices in world commodity and energy markets.
The bank said that it would take all necessary measures to prevent a sharp rise in domestic prices and ensure continuity of the payment system and financial stability. #Fed, BoE, Rates Hike to Force CBN into Hawkish Mood
READ: UK Inflation to Rise Sharply for Next Six Months, Says Fitch
