Interest Rate to Rise Further before Hold Regime – TrustBanc GMD

Nigeria’s gross domestic product (GDP) growth has been projected to taper in 2023 as Central Bank (CBN) deploys benchmark interest rate hikes as a tool to fight rising headline inflation.

In a very similar pattern, the CBN and United States (US) Federal Reserve interest rate hikes have been following a similar pattern. This, according to analysts, is to make Africa’s largest nation competitive in attracting foreign investors.

There have been heavy, strong and sustained flights to safe haven. Analysts inform Daily Global News  that money goes to where it is treated well. The interest rate hike is putting pressure on production, and financing costs.

In the first quarter of the year, the apex bank maintains its monetary tightening, mirrored by global developments. The monetary policy rate, the benchmark interest rate was adjusted upward by 50 basis points to 18% in March.

Interest rate is expected to rise further by another 50 basis points before a hold regime, according to Jimoh Abubakar, Group Managing Director, TrustBanc Financial Group.

The CBN has been faced with criticism from economists, and analysts over its monetary policy tightening as the fight against accelerating inflation rate gets dirty.

Recall that the monetary policy committee began a journey into interest rate hikes in May 2023, a contraction approach which analysts feel has failed to solve pressures associated with the consumer price index.

With claims that the US banking crisis was spurred by Fed’s hawkish tone, analysts have expressed a divergent view about the possibility that CBN will stop pushing rates higher and allow inflation to fly.

TrustBanc Financial Group GMD said that based on current developments, this is not a systemic contagion that will filter into Nigeria, the world is not in a banking crisis.

“Rather, what we have seen is that the banks in recent headlines had risk management issues with their traditional assets, and rapidly rising rates exposed those weaknesses”.

Ratings agencies’ reports showed that Nigerian banks are not really exposed to shake-ups in the US banking sector. However, Daily Global News noted that there are some financial technology operators that will face the spillover of downward asset pricing.

By size, analysts said impacts on such operators are minimal to the size of the Nigerian economy and in terms of possible job losses.

With the March inflation print coming higher again, the CBN may intensify efforts to rein in the accelerating consumer price index, which is about to quadruple its inflation targeting rate of 6% – in the lower band, and 9% in the higher range.

After the apex bank interest rate hike in March, the gap between the inflation reading of and the monetary policy rate adjusted.

Speaking about what this means for the market, TrustBanc Capital’s chief said the gaps help with insights on real returns.

“It shows that negative real return is currently declining. It also confirms that the CBN is bent on increasing rates so far inflation continues to maintain an upward trend”.

Abubakar said CBN’s MPC decisions are partly driven by US rate hikes, noting that MPC had been dovish since 2020 and held MPR at 11.5% even when inflation rate climbed to 18.17% in 2021.

“The moment Fed started increasing interest rates in March 2022, MPC immediately changed tone and joined the rake hike train at its next meeting in May 2022 when Nigeria’s inflation rate was less than 18%”, Abubakar added.

He said that the pattern of MPR hikes has been similar to Fed rate hikes, adding that there is a possibility of another 50bps hike before a hold regime, the pause to the hawkish mode will likely coincide with when Fed stops hiking.

On the exchange rate, TrustBanc Chief said the exchange rate projection for 2023 hangs on stronger oil production, reduced subsidy or complete removal, and improved intervention in the foreign exchange market.

“I see the Naira slipping to N490 to the United States dollar in the official window where it is currently overvalued. As for the parallel market, it will appreciate and possibly trade below N700”.

The Nigerian economy stands on higher inflation, interest and worsening exchange rates. On the other hand, analysts reveal that higher interest rates will support banks’ earnings in 2023.

Some banks recently told customers they have started factoring increased rates into transactions- both deposits and lending sides.

For Nigerian banks, analysts noted that there are both up and downsides to higher inflation, interest and FX rate movements.

Explaining, TrustBanc Chief said higher interest rates tend to favour banks in the short run because of their capacity to expand their margins as rates go up.

He also added that higher foreign exchange rates and devaluation typically favour banks with net FX assets, saying this is usually the case for Tier-1 banks.