Can Interest Rate Go Higher?

Dear Speculators,

One thing for sure this week is that the monetary policy committee will not be short of hot topics to discuss during the upcoming meeting. From big global events in developed markets like the surge in the euro since Macron's victory in France to political uncertainty in Britain as the parliamentary elections draws closer and finally to Trump's row with the intelligence community that is weakening the dollar. Some more interesting topics like the possibility of a second impeachment of a Brazilian President in less than two years and military unrest in Ivory Coast that is driving up cocoa prices will also be on the table. Troubling news closer to home is the current crude oil price spending more time below $50 than above it as OPEC tries it's best to manage the oil glut.

Still none of these issues rocks the monetary policy boat as much as the proposed 2017 budget of 7.44 trillion Naira currently on the President's desk. Why? The government plans to fund the budget with about N1.3 trillion of local borrowing and N1.1 trillion of foreign debt. The implication? Rising government borrowings from the local market could drive interest rate higher at a time when the Central Bank can't wait to cut interest rate.

To make matters worse, the potential rise in bank lending rate caused by excessive government borrowing could be inflation-neutral in that the rise in interest rate which will ordinarily drive inflation lower will be accompanied by higher government spending which could push inflation higher. Thus leaving the inflation stuck between 15-16 percent during the final quarter of the year, far from the apex bank’s upper inflation target rate of 9 percent.

Although Nigeria needs to loosen monetary policy to boost productivity and household spending, a large fiscal policy expansion may cause monetary policy to tighten so as not to overheat the economy or cause galloping inflation.

While the outcome of this week's meeting to leave all policy rates unchanged is more than obvious to all interest rate observers since inflation rate is now responding to earlier policy decisions, the market will be expecting to get more information on the Central Bank exchange rate policies especially the new exchange window, illiquidity in the system and how much more dollars CBN could possibly inject into the system using external borrowing which could potentially be costly to the nation in the not too distant future.

Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

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