• Saturday, April 13, 2024
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Low global interest rates and Nigeria’s capital markets



The zero interest rate policy (ZIRP) and quantitative easing embarked upon by central banks in most developed economies has led to a flood of money moving into emerging and frontier capital market assets.

Interest rates were first cut to their current low levels in the aftermath of the global financial crises of 2008 – 2009.

Artificially low interest rates – close to zero cash rates and negative real rates – are in place in much of Europe, the US, the UK and Japan.

The artificially low rates put upward pressure on the currencies of other countries running traditional interest rate policies.

International money flows are also drawn to currencies paying the most attractive interest rates which in turn push those currencies up.

Nigeria has in recent times benefited from investors playing the so called carry trade, whereby they borrow in a low interest rate environment to invest in assets in economies with a high interest rate.

The Institute of International Finance (IIF) raised its projections for capital flows to emerging markets this year on the back of increased risk appetite.

The IIF – which reunites more than 470 financial institutions globally – notes that because of the “exceptionally easy” monetary conditions in mature economies and favourable growth conditions in emerging economies, capital flows are expected to increase this year to $1.118 trillion – an upwards revision of $18 billion from last October’s prediction.

Nigeria’s equity and debt markets attracted significant capital flows in 2012 with the Nigerian Stock Exchage (NSE) advancing by 35.42 percent.

2012 macro-economic fundamentals