• Wednesday, April 24, 2024
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BusinessDay

Cardoso fires two big signals with 600bps rate hike in one month

Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), fired at least two strong signals to the investor community with the apex bank’s latest interest rate hike on Tuesday.

First is that the CBN is well aware of the competition it faces from emerging market peers for investor funds and will do what it can to beat them to those funds.

Second is that the CBN is very much independent as it has gone on to hike rates despite the implication for the government’s borrowing costs.

The CBN has in the space of one month matched the 600-basis-point hike delivered by its Egyptian counterpart in one fell swoop.

“Good move from Nigeria,” said Charles Robertson, head of macro strategy at FIM Partners.

“That’s pushed up interest rates by 6 percent (600bp) in about a month, equal to Egypt’s one off hike. Both countries are now serious about stabilising currencies and cutting inflation,” Robertson said.

The CBN had in February hiked rates by a record 400 basis points and has followed that up with another 200-basis-point increase, taking the monetary policy rate to 24.75 percent, the highest since 1999.

The committee decided to further tighten monetary conditions in response to the rising inflationary trend, which accelerated by 180 basis points to 31.70 percent in February.

International investors are already beginning to dip their toes back into Nigerian local debt after the much-needed rate hike last month.

The latest hike, combined with the steady climb in the naira’s value against the dollar, is expected to attract even more interest from offshore investors.

Analysts in a BusinessDay survey had predicted a 100-basis-point hike but the CBN surprised them with double their expectations.

The second signal the CBN fired with what is now a 600-basis-point hike in one month is that the Abuja-based bank is independent and that Cardoso is not tied to the apron strings of his long-time boss, President Bola Tinubu.

There were initial fears that Cardoso, who served as the commissioner for the Lagos State Ministry of Economic Planning and Budget when Tinubu governed Lagos, would balk at an aggressive rate hike to keep the government’s borrowing costs low.

Cardoso’s predecessor, Godwin Emefiele, had kept interest rates artificially low in the face of spiralling inflation as he weighed the impact of a hike on the government’s finances.

The low interest rate environment distorted the market and handed savers and investors with negative returns on their savings and investments.

Artificially low rates were however unable to stop the government from splashing the bulk of its revenues repaying creditors.

Nigeria spent over 90 percent of its revenues servicing its loans in 2023.

Cardoso doesn’t seem to worry much about that as he keeps his focus on the core mandate of the CBN: price stability.

Cardoso, who had voted for an even bigger rate hike in February, was widely expected to raise rates again at the meeting in his bid to deliver real positive returns on naira assets.

The gains of the last hike include increased investor participation in local bonds and a surge in diaspora remittances, with the dollar inflow helping to stabilise the embattled naira.

The naira jumped to a three-month high of 1,300 per US dollar on Wednesday, continuing a steady climb from a low of 1,600/$ last month, according to data from FMDQ Securities Exchange, which calculates the rates.

A dollar sold for N1,300 at the black market on the day, according to data collated from multiple traders.

The rate hike is a boon for fixed income assets, with higher yields likely to trigger increased local and foreign investor participation.

Analysts expect the naira to strengthen further in the coming days on the back of the likely increase in foreign interest for Nigerian fixed income securities from Treasury bills to Bonds.

“We expect fixed-income securities yields to increase, leading to sustained foreign interest in Nigerian assets, which is crucial for exchange rate stability,” said Tunde Abidoye, a research analyst at FBNQuest.