Coronation Research, a part of Coronation Merchant Bank Group, has said there are strong indications that the Central Bank of Nigeria (CBN) will raise interest rate in fourth quarter(Q4) of 2018 to retain foreign portfolio investors in the country.
Speaking on interest rate outlook for 2018, the research firm, noted that conditions for emerging market currencies have deteriorated in the last two months. According to the company, while the crisis in the Argentinian Peso is an extreme example, few emerging markets can take their exchange rate for granted and in some cases market interest rates have risen.
It explained that countries such as Kenya and Egypt, that offer one-year risk-free local currency yields in excess of 5.00 percentage points (pp) above inflation, have had the best experience of preserving their foreign exchange rates over the year.
â€œNigeria offers a one-year risk-free rate of 0.72 pp over its inflation rate. In as much as the CBN wishes to keep interest rates down, we believe that it will have to raise market interest rates by Q4 2018. The CBN is aware of the risk of outflows of foreign investment in naira money market instruments and the threat of pre-election spending that will most likely feed through to inflation in H2 2018. For these two reasons we think that the CBN will raise its open market operation (OMO) rates to achieve an annual yield of 14.00 per cent-15.00 per cent by Q4 2018, from 13.20 per cent per annum recently. However, we doubt that it will make an overt signal by raising its Monetary Policy Rate (MPR) above 14.00 per cent pa this year,â€ the company said.
According to Head of Research, Guy Czartoryski, a significant part of Nigeriaâ€™s Naira-denominated risk-free securities are held by foreign investors and logic suggests that CBN must increase interest rates dramatically to keep the investors.
â€œHowever, we believe the CBN will keep interest rate rises to the minimum, while allowing a degree of foreign exchange reserve deterioration if foreign investors either sell or do not renew their Naira fixed income positions ahead of elections in February 2019. We think that the CBN would tolerate a degree of parallel exchange rate deterioration, if this results,â€ Czartoryski said.
The company said Nigeria will have to offer a higher interest rates more than what the market currently offers to attract international investors looking for a return, and lock in domestic funds that might otherwise go to the foreign exchange market.