NIGERIA FACES PRESSURE TO RAISE INTEREST RATES
Nigeria’s Central Bank will come under pressure in coming months to increase interest rates as Central Banks in developed economies adjust to life after the worst of COVID-19 by raising rates to levels before the pandemic. The US Federal Reserve, the equivalent of the Central Bank of the United States, laid out a plan Wednesday to slow their bond buying programme, their first major step toward withdrawing monetary policy support.
The US Fed said it would start tapering asset buys by $15 Billion per month later this month, a move that would lead to higher interest rates in the US. It confirms earlier expectations that the US would be scaling back on its pandemic-induced $120 Billion monthly asset purchase programme amid uncertainty over persistent inflationary pressures.
Other global central banks are also likely to start cutting back on enormous pandemic-related stimulus programmes that caused interest rates to fall last year, as they supported their economies in the face of one of the sharpest contractions in history. The Bank of Canada already surprised markets last week when it ended its government bond purchase programme and moved up the time frame for when it might first raise its benchmark interest rate from its current near-zero level.
Speculation that the Bank of England could be the first major central bank to nudge up interest rates has also intensified in recent weeks after Governor Andrew Bailey warned on October 17 that the central bank “will have to act” if surging prices for goods and energy push up Britons’ expectations of future inflation. Nigerian monetary authorities are well aware of the trend of rising global interest rates and the impact it would have on the economy.
The common theme in the statements of members of the Monetary Policy Committee (MPC) published last week on the CBN website was that the normalisation of monetary policy in advanced economies would spark a reversal in international capital flows from emerging and developing markets including Nigeria. For investment-starved Nigeria, the MPC members were of the view that a reversal in fund flows could widen the country’s recovery gap. Those fears led them to highlight the need for deliberate policies to mitigate the adverse impact of the global interest rate hike.
One of such policies could be to raise interest rates, a tactic that has been traditionally resorted to by emerging and frontier markets to enable them compete for investment inflows against developed economies.
In Nigeria, however, the CBN has reasons to balk at raising interest rates.
There is the need to support the country’s recovery from two recessions in five years while the government’s already high debt servicing costs means a further hike in rates would not go down well in Abuja. The CBN’s new found love for unorthodox policies also means it may resort to other ways of luring foreign capital other than raising interest rates.
“While it is logical that they raise rates in order to stay competitive for foreign inflows, Nigeria has warmed up to unorthodox policies recently and may not change rates,” one economist said. Nigeria’s problem may however be bigger than just raising interest rates to attract foreign portfolio investors who have largely snubbed the West African country this year due to foreign exchange challenges, but the situation may get worse.
Following the COVID-19 impact on the global economy, several countries around the world including the US, Canada, Russia, and the UK and Nigeria, among others, had embarked on rate cuts last year. Nigeria cut interest rates twice last year – first in May and second in September 2020, taking the rate to 11.5 percent, the lowest since the recession in 2016. Stubborn inflation is also a problem in Nigeria but the CBN has kept rates steady as it seeks to stimulate the economy.