Impact of hike on interest rate by 25 basis points will be mute on financial market- Experts

The recent increase in the monetary policy rate by the central bank from 18.5% to 18.75% is unlikely to impact the financial market. This is according to financial market experts, who spoke to Nairametrics.

This is also contrary to the expectations that the increase will dampen investors’ demand for the equities market and encourage investors to navigate toward the fixed-income market.

The financial experts who spoke exclusively with Nairametrics said they expect more liquidity in the system and that the increase by 25 basis points was dovish compared to previous increases which according to them is not going to be impactful to the financial market.

What the experts are saying:

The Managing Director, of Arthur Steven Asset Management Limited, Mr Olatunde Amolegbe reacting to the development in an interview with Nairametrics said the increase is very dovish compared to the increases the country has seen in the past few years.

Amolegbe noted that the recent increase was the lowest Nigeria has seen and what that indicates is that the MPC was very conflicted about the decision to take when it comes to do with rate.

“The current rate is coming from several factors, first is to meet the mandate of the president to reduce interest rate versus the elevated level of inflation.
 
The inflation level in June showed a sustained surge, and typically the MPC is raising rates to combat inflation surge. 

The MPC was caught between raising the rate to curb inflation and the same time trying to meet the mandate of President Bola Tinubu on the interest rate. The President’s mandate and inflation are working on conflicting sides of interest rates.

Another factor is the elevated level of liquidity within the financial system and CBN normally raises interest rates or increases issuance of securities to reduce liquidity in the system.

My conclusion is that the MPC decided to split the difference between liquidity, President’s mandate, and rising inflation. That is how they arrive at taking the dovish stand while addressing the issues.

That’s why the level of increase we have seen is the lowest the MPC has been moved in the last five sessions,” he said.

According to Amolegbe, the impact on the financial market is going to be mute. He added that 25 basis points were enough to be too impactful to the financial market but that will not stop the normal profit takings market all over the world experience.

“If they had raised it by a larger figure, we would have said that bond yield will rise. That would hurt the equities market, but because the quantum of the raise is not that large, it will not have an impact on the equities.

And given that inflation is still rising significantly, and the market is still liquid, we might not see any different movement in the market. 

If they had raised it by 100%, the financial market would have responded. Given that the market is still significantly liquid, this dovish stand that MPC has taken might not affect the market.

We will continue to see yield drop further due to significant system liquidity, and if yield continues to drop, the equities market will continue to benefit as more money floats towards the market in search of positive inflation-adjusted returns,” he said.

Mr Johnson Chukwu, Managing Director, Cowry Asset Management Limited said:

“We expect more liquidity to go into the equities market. As it relates to the fixed income market, I don’t think the drag-along effects of this increase of interest rate to 25 basis points will have any effect on equities. 

Fixed income instruments, particularly federal government debt instruments like treasury bills, and bonds are the ones that will drive fixed income instruments, but as long as the interest rates in that segment are not going up, people will continue to go to equities”. 

Mr David Adonri, Executive Vice Chairman of Hicap Securities Limited, said the recent increase sent a signal that the monetary policy is still contractionary.

“Monetary policy is a short-term demand management strategy; it will pave the way for long-term fiscal policy to address the structural factors affecting rising inflation. 

The fiscal authority right now has inadvertently taken measures that will in the short-term fuel inflation. Subsequently fiscal policy itself must be adjusted to be contractionary. The purpose of the rate hike is to rein inflation,” he said. 
The Managing Director, of Crane Securities Limited, Mr Mike Eze, also speaking with Nairametrics said the hike in interest rate is to control the rising inflationary rate.

He noted that the MPC is being careful because, with the current state of the economy, any slightest mistake will land the country into recession.

“The current state of interest rate is worrisome; they want to prevent the economy from going into stagnation. 

There is no more purchasing power in the hands of Nigerians. Nothing is happening in the economy.

There is so much money in circulation. I think it was one of the reasons for the rate hike. It will encourage people to deposit their money in the banks, and that’s an indirect way of mopping up the liquidity because the inflationary is very high.

We hope that before the expiration of 60 days window granted to the President for ministerial appointments, we will know who the finance minister is to give direction to the economy. The earlier the President appoints the economic team and the ministers the better,” he said.