Dear Speculators,
Interest rates has been one of the main topics of business discussions in 2016, maybe even more popular than crude oil prices. While Americans and Europeans are wondering when interest rates will go up, Nigerians can't wait for rates to go down. Both regions can't seem to jump start their economies regardless of what the Monetary Policy Committee is doing. Perhaps the fault of the current economic crisis is less on the monetary policies of the Central Banks and more with the weakening fundamentals in the global economy.
If rates were to go up before inflation in Europe, the economy could overheat and enter a recession but if rates were to go down in Nigeria, negative real yields would be unattractive to investors. The double digit rate of inflation in Nigeria is currently caused by an overshoot of the dollar price and harsh restrictions on capital outflows in the country. Both almost unavoidable problems given our current circumstances.
Historically, consumer spending rises during the ember months which will put more strain on the Naira during the coming months. The foreign loans Nigeria seeks to raise may be able to reduce the downward pressure we foresee in the Naira by year end but we expect year on year inflation rate to continue to rise slowly till early 2017. Over the next few quarters, if our economy starts to grow rapidly and the Naira stabilizes, we could take advantage of the price deflation in the industrialized nations to offset rising prices in the country. But at this point in time, it almost feels like wishful thinking.
If eventually the Federal Reserve raises interest rates by December, we expect dollar to strengthen significantly against all major currencies. The only way the CBN can manage inflation rate in such situation is to ensure availability of dollar all through the ember months into next year. CBN will be hoping for crude oil prices to exceed $60 by November if they are to meet up with the Forex demand in December. As inflation potentially trends downwards in Q1 and Q2 2017, so will interest rates in Nigeria.
Interest rates has been one of the main topics of business discussions in 2016, maybe even more popular than crude oil prices. While Americans and Europeans are wondering when interest rates will go up, Nigerians can't wait for rates to go down. Both regions can't seem to jump start their economies regardless of what the Monetary Policy Committee is doing. Perhaps the fault of the current economic crisis is less on the monetary policies of the Central Banks and more with the weakening fundamentals in the global economy.
If rates were to go up before inflation in Europe, the economy could overheat and enter a recession but if rates were to go down in Nigeria, negative real yields would be unattractive to investors. The double digit rate of inflation in Nigeria is currently caused by an overshoot of the dollar price and harsh restrictions on capital outflows in the country. Both almost unavoidable problems given our current circumstances.
Historically, consumer spending rises during the ember months which will put more strain on the Naira during the coming months. The foreign loans Nigeria seeks to raise may be able to reduce the downward pressure we foresee in the Naira by year end but we expect year on year inflation rate to continue to rise slowly till early 2017. Over the next few quarters, if our economy starts to grow rapidly and the Naira stabilizes, we could take advantage of the price deflation in the industrialized nations to offset rising prices in the country. But at this point in time, it almost feels like wishful thinking.
If eventually the Federal Reserve raises interest rates by December, we expect dollar to strengthen significantly against all major currencies. The only way the CBN can manage inflation rate in such situation is to ensure availability of dollar all through the ember months into next year. CBN will be hoping for crude oil prices to exceed $60 by November if they are to meet up with the Forex demand in December. As inflation potentially trends downwards in Q1 and Q2 2017, so will interest rates in Nigeria.
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
Managing Partner,
Emeka Ucheaga Advisory
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