Firm Explains Impacts of Interest Rate Hike in the Market
The Central Bank of Nigeria’s (CBN) monetary policy committee hiked the rate by 4% to 22.75% is expected to have impacts across the financial markets. A slew of analysts think the increase could be an overkill to the economy struggling to survive.
The rate tightening was anchored on heightened inflationary pressures, the exchange rate volatility and the expectation of future hikes in inflation. In its response, advisory and wealth management investment firm Cedrus Group explained that monetary policy would reshape the direction of the financial market in the coming months.
Analysts said before the MPC meeting, the market had been in anticipation of a hike in the interest rate this was evident in the fixed income market as the recent Treasury bill auctions had stop rates of 17% – 19%, the oversubscription in these auctions further indicates strong demand.
The Central Bank’s hawkish stance is likely to lead to higher yields in the fixed-income market, Cedrus Group said. It noted that the equity market has experienced a decline in portfolio value as investors shift their focus to fixed-income assets to benefit from the anticipated rise in yields.
“While we anticipate a further plunge in the market in the short term, this presents a potential opportunity for investors to acquire stocks with sound and strong fundamentals. The recent increases in the Cash Reserve Ratio (CRR) and the adjustments to the asymmetric corridor will affect the cost of borrowing for banks from the Central Bank”.
The firm believes this could lead to higher interest rates on business loans as banks aim to recoup their increased borrowing costs. Additionally, these changes may make some banks more cautious in their lending practices, particularly towards riskier businesses.
According to the firm, the volume of money in circulation is a factor influencing inflation, which the Central Bank is attempting to control through increases in the Monetary Policy Rate (MPR).
“While the intention is to reduce the money supply and subsequently inflation due to lower demand, Nigeria’s import reliance may lead to continued borrowing despite high interest rates. This could, in turn, translate to higher prices for commodities in the market.
“We anticipate the recent developments in the Bureau de Change (BDC) market, coupled with the clearing of a significant portion of the foreign exchange (FX) backlog, to exert a positive influence on the naira exchange rate”.
Cedrus maintains that the measures taken in the BDC market are expected to curtail the depreciation of the naira, while the reduction of the $2.2 billion FX backlog by $400 million is likely to contribute to greater stability in the FX market and potentially strengthen the naira.
The group anticipate a further increase in the monetary policy rate in at the next meeting. “Based on these developments, we forecast a moderate increase in the Monetary Policy Rate (MPR) at the next Central Bank meeting. This increase is likely to be within the range of 150 to 250 basis points”. #Firm Explains Impacts of Interest Rate Hike in the Market
