FXTM Senior Research
Analyst
Unfavorable macroeconomic conditions
across the globe have prompted major central banks to embark on a monetary
easing cycle to counter a global slowdown.
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There is widespread speculation that
the US Federal Reserve intends to trim interest rates in order to prevent an
economic deceleration in the world’s largest economy. The global financial
markets have reacted positively to the idea, which theoretically makes access
to funding for business activities easier, boosting investor sentiment and
economic growth.
The US central bank’s caution is
influencing other central banks like the European
Central Bank, Bank of England and
Reserve Bank of Australia among many others. In Africa, the South African Reserve Bank has already
cut interest rates while the Central Bank of Nigeria (CBN) is turning dovish
amid deteriorating economic conditions in the wake of trade disputes.
However, in its July meeting, the CBN
decided to keep its Monetary Policy Rate
(MPR) unchanged at 13.5 percent to allow time for the full impact of other
measures. So far, these include a firm bank directive from July requiring 60
percent of deposits to be available for lending to the real economy instead of
buying government securities.
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These securities are high yield because
of the current 13.5 percent MPR and understandably attractive to the banking
sector seeking stable investments of their own. Making sure money is in
circulation instead of being tied up in government bonds sounds like a rational
way to keep the economy on the road to recovery.
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After surprising markets with an
unexpected rate cut in March, the central bank could cut interest rates again
during the second half of 2019. However, reducing the MPR when the inflation
rate is already at 11.22 percent risks further overheating prices. Like many
other emerging economies, Nigeria may be exposed to the impacts of a global
slowdown but its economy is very different to the US’ which is currently
experiencing anemic price inflation. This may be why the CBN decided to
prioritize reducing inflation to single digits and said it is in no hurry to
reduce its key rate.
In other effects, foreign investment in
Nigeria is likely to see benefits from the CBN’s decision to hold rates at 13.5
percent. This is based on the argument that international investors may be
looking for higher-yield securities than those in the mature markets,
especially in the light of declining or negative interest rate environments in
Europe and the US.
The global monetary easing bandwagon
has affected the oil markets differently from global equities. Instead of being
heartened by the prospect of better lending rates, investors are focusing on
the weaker global outlook for growth and Oil demand. The fact that OPEC decided
to maintain its supply cuts until 2020 on the basis of weaker demand for Oil
only reinforces the impression that it would take a dramatic event to reignite
supply-shortage fears.
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In addition, the US Oil industry is
pumping output at record levels, meaning that OPEC supply cuts are effectively
neutralized in terms of boosting Oil prices. These circumstances have pressured
Oil price benchmarks, West Texas Intermediary (WTI) and Brent Crude. Oil prices
depreciated during the course of July, pulled back by a reverse tide of lower
growth expectations.
The third quarter holds the potential
for the Central Bank of Nigeria to cut interest rates. A fragile economic
recovery coupled with external risks in the form of trade tensions and Oil
price volatility should encourage the CBN to re-join the global monetary easing
bandwagon. Although a rate cut is in the pipeline, the level of inflation will
determine how many times the CBN pulls the trigger on rate cuts. Signs of
easing inflationary pressures during the third and fourth quarter of 2019 could
offer enough breathing room for the CBN to cut rates to 13% by year end.
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