Skip to main content

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.  

https://ssl.gstatic.com/ui/v1/icons/mail/images/cleardot.gif
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

Comments

Post a Comment

Popular posts from this blog

The Wrong Forecaster

Dear Speculators, The gloominess of the Nigerian economic outlook has significantly knocked down the prices of some financial assets but the real value of some of these assets have been mildly affected. While recounting the economic misfortune that has befallen the country in the last two years is inevitable, dwelling on the past is a perfect time wasting activity. Luckily, investment is forward looking and not regressive thinking. The past is a great indication of the future but not a mirror for prediction. The randomness of the world ensures that yesterday looks at least slightly different from tomorrow. And if we have learnt anything from the history books, it is that good things do not last forever and bad times always have an end. Life is by definition cyclical. The key questions to ask before buying or selling any financial asset is; will the current economic situation last forever? Will the inflation rate remain in double digits over the next 5 years? Will the Nai...
Post a Comment
Read more

Everything is Going Down in Nigeria Except Inflation

Dear Speculators, The wait is over, we anticipated bad news and we got it. Our fears have become reality, the economy has continued to back slide and Nigeria has officially tipped into a recession. Not that this surprises anyone though. Falling oil prices, dollar scarcity, exploding oil pipelines, massive labour retrenchment and import restrictions have all contributed their fair share to weaken growth in Nigeria's economy. However, the stock market arguably has had it worse than the general economy this year as the market is currently down about 3.8 percent against an economy contraction of 2.06 percent in the second quarter. A closer analysis of the stock market brings to light some intriguing statistics. The largest 49 companies in the stock market account for 97% of the total stock market capitalization. 41 companies of the 49 sell at an average of 22x earnings. Only 49 companies out of a total of 171 companies trading on the Nigerian Stock Exchange are valued above ...
Post a Comment
Read more

It's a Dip not a Bear

Despite strong economic fundamentals and fairly optimistic market sentiments that have driven stock market prices in the past year and even stronger since the start of 2018, stock markets all around the world are witnessing an unexplained coordinated price descent in the past one week. Asides the biggest bitcoin price crash in years, now 66% lower than its record high price of $19,500 in December, nothing out of the ordinary has occurred. Yes, stock prices are at the highest it's been in since pre-crisis era in U.S and the market is due for a price correction but then how do we explain market dips in relatively cheap emerging markets? Something is amiss! As Central Bankers around the world have begun to discuss monetary tightening in a coordinated fashion as the quest for 2% inflation seems more achievable this year due to strong global economic and rising commodity prices, bond prices have dropped precipitously and the U.S 10 year Treasury bills risen above 2.5% a...
Post a Comment
Read more