Follow Us on Google
Omodele Adigun
Any remaining hopes over the Central Bank of Nigeria’s (CBN)cutting of interest rates in the near term have been dashed by signs of rising inflationary pressures, says Lukman Otunuga, the London-based senior Research analyst with FXTM.
Inflation rate has jumped to a 17-month high at 11.6 per cent in October, from the 11.24 per cent seen in September due to rising food prices, according to the National Bureau of Statistics (NBS).
Commenting on this, Otunuga said the CBN is unlikely to cut interest rates from 13.5 per cent this month due to the uptick in inflation and this sentiment is likely to roll over into 2020.
His words: “Although one of the central bank’s objectives is to achieve price stability, an interest rate cut has the potential to stimulate consumption which accounts for roughly 80 per cent of GDP. Given how the Federal Reserve has signalled a pause on further rate cuts, this may complicate the CBN’s efforts to ease monetary policy in 2020,” Otunuga said.
The Federal Reserve last July cut its interest rates by 25 basis points for the first time since the global financial crisis in 2008. This followed the CBN’s last March reduction of the Monetary Policy Rate(MPR) by 50 basis points to 13.5 per cent from 14 per cent
Commenting on the development then, Otunuga, had reasoned that easing monetary policy typically boosts risk assets and weakens the currency.
“However, the reaction across financial markets was the complete opposite with stocks tumbling and Dollar charging to a fresh two-year high.
“Although the US rate cut was widely expected, the forward guidance left investors with more questions than answers. With Jerome Powell suggesting that the Fed was not about to start a long series of rate cuts, investors are now pondering whether July’s move was a “one-and-done. While the Fed also left the door open for future cuts, saying it will “act as appropriate to sustain the expansion”, this will be heavily influenced by data and US-China trade developments”, he added. As for its implications for Nigeria, Otunuga said: “Although inflation in Nigeria remains above the 6 per cent to 9 per cent target range, the CBN is likely to cut rates in a bid to revive growth by stimulating consumption. How deep rates are cut will depend on inflation. With lower rates encouraging businesses to bolster investments and offering banks more incentive to lend to corporations and households, this will be supportive of Nigeria’s growth.”
The FXTM , however, opined that unforeseen circumstances could still force the CBN to take action despite the threat of rising inflation.
“The next major economic release from the Nigerian economy will be the third-quarter GDP figures scheduled for release on Monday 25th of November. Markets are predicting growth to expand two per cent during the third quarter (Q3). Should the report disappoint, the CBN could be forced to take action despite the threat of rising inflation,” he said.
