Thursday, 1 August 2019

FED RATE CUT OPENS DOORS FOR CBN TO RE-JOIN GLOBAL EASING TRAIN

Lukman Otunuga,
Senior Research Analyst, FXTM

History was made yesterday after the Federal Reserve cut its interest rates by 25 basis points for the first time since the global financial crisis in 2008.

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Typically easing monetary policy 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”.

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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 incoming data and US-China trade developments.

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The Central Bank of Nigeria is poised to jump aboard the global monetary easing train in September now that the Fed has made a move. Although inflation in Nigeria remains above the 6%-9% 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 and second quarter GDP data.  With lower rates encouraging businesses to bolster investments and offering  banks more incentive to borrow to corporations and households, this will  be supportive of Nigeria’s growth.

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