Nigeria has given the clearest signal yet of its willingness to allow interest rates go up to match rising inflation and compensate weary investors after it sold one-year OMO bills at a record high of 21 percent.
The stop rate at the OMO auction held on Monday, October 30 was as high as 17.5 percent for the one year tenor, almost double the 10 percent at the last auction. The stop rate works out to an effective yield of 21 percent which is the conversion of the 17.5 percent rate for 365 days to yield.
The higher interest rate meant the auctions were oversubscribed with investors staking as much as N325 billion, more than double the N150 billion on offer.
The Central Bank of Nigeria (CBN) would hike interest rates towards 25 percent and ensure market interest rates double to the same level in a bid to fight inflation, attract foreign investment and stabilise its embattled currency, according to sources familiar with the matter.
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Market interest rates have already started rising in a signal of the CBN’s commitment to bid rates higher. The stop rate on the one-year Treasury bill also climbed 3.75 percent to 13 percent at the last primary auction on Oct.25 compared to the previous month.
While the benchmark interest rate already stands at a record high of 18.5 percent, market rates have been a lot lower, with authorities worried about the impact of high interest rates on the government’s already high debt servicing costs.
Artificially-low market rates left holders of naira-denominated assets with Africa’s worst negative real returns and muted the gains of the CBN’s bold reforms to allow the naira to weaken by more than 40 percent on the official market.
Dollar supply into Nigeria has remained elusive even after the CBN followed up the devaluation by allowing importers of some 43 blacklisted items to buy dollars from banks again after an 8-year ban.
“The alternatives to boost dollar supply are to let the FX market find its own level – and to stop the NGN overshooting too much, that requires tighter fiscal and monetary policy – which are anyway required to get inflation under control,” Charles Robertson, head of macro strategy at FIM Partners, an asset management firm, said.