Interest Rate Hike Tormenting for Nigerian Companies – Analysts
Ahead of the Central Bank of Nigeria (CBN) monetary policy committee (MPC) meeting on February 26, a slew of industries analysts have said a potential decision to increase benchmark interest rates would be tormenting for local companies. This will put the apex bank in dilemma after it has close sectorial credit intervention.
MarketForces Africa reported that credit to the private sector grew in 2023. However, borrowing for companies has become expensive, reducing margins despite a slowdown in sales volume – data from fast moving consumer goods companies listed in the stock market confirmed revenue grew due to price hikes, while volume sales nosedived.
Price instability has put a cap on house finances, resulting in a slowdown in aggregate consumer spending. The headline inflation rate rose throughout 2023, according to data from the statistics office, despite an increase in the monetary policy rate to 18.75%, a situation that has pushed some bank lending rates near 40%.
By market consensus, the monetary authority has no luxury to cut the policy rate as Nigeria’s inflation rate nears 29% before the exchange rate devaluation in the recent week. The Naira exchange rate was lower above N1400 following the FMDQ pricing methodology adjustment, a subtle, non-noisy devaluation that sent a red light across the nation.
In their discussion with MarketForces Africa, market analysts believe that companies are struggling with pressure in the business environment following multiple declines in macroeconomic indicators. Banks Face Risks over 24hrs FX Positions Sell Down
Interest rate hikes in addition to the tight economic conditions could result in unintended consequences, including job losses. Companies are scaling back operations due to increased production costs as inflation continues to accelerate with no end in sight.
The CBN’s decision to float the local currency to obtain a market clearing rate has damaged some companies, including smaller banks’ balance sheet quality. Despite the destructive tendency, the apex bank is unlikely to cut interest rates and maintaining a hold could extend the longevity of inflation conditions.
US Fed whose CBN policy direction has always been mirrored has kept rates steadied as inflation slowed down. At best, the monetary policy committee could hold the rate but that would come in contrast against a plan to rein in inflation to 21% in 2024.