Corona­tion Re­search: CBN May Raise In­ter­est Rate to At­tract For­eign In­vestors


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.

“Nige­ria 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,” the com­pany said.

Ac­cord­ing to Head of Re­search, Guy Czarto­ryski, a sig­nif­i­cant part of Nige­ria’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.

“How­ever, 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,” 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.

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