Why CBN May Not Raise Rates in 2019

• Why CBN May Not Raise Rates in 2019

The uncertainty surrounding global growth is forcing central banks to make monetary adjustments in order to stimulate and sustain growth.

Global View

On Tuesday, the Federal Reserve Chair, Jerome Powell, said the central bank will do anything possible to sustain U.S economic productivity.

The comment was after previously signaling zero rate hike earlier this year, however, the inability of President Trump to reach an agreement with the Chinese has changed the dynamics of global trade in recent months and expected to further erode productivity in developed economies if nothing is done.

According to the U.S central bank, weak global growth amid efforts to maintain 2 percent inflation rate will necessitate monetary adjustments.

This has led to many experts projecting that the Federal Reserve will cut rates by 50 basis points this year, with the odds of that happening jumping to 70 percent this week.

In Australia, the story is not different, the Reserve Bank of Australia cut rates by 25 basis points for the first time in over three years on Tuesday, citing weak growth amid record low unemployment rate and sluggish wage increase.

The European Central Bank and the Bank of Japan are expected to increase economic stimulus, especially after the Fed’s comment and Australia move.

Nigeria

While the Central Bank of Nigeria lowered interest rate by 50 basis points to 13.5 percent in the first quarter, citing improved macro factors. The truth is the CBN led Monetary Policy Committee lowered interest rate after enough evidence showed the U.S., the European Central Bank, Bank of England, the People’s Bank of China and Bank of Japan won’t be raising rates in 2019 given the fragile state of global economy and the uncertainty surrounding the U.S-China trade talks.

The apex bank anticipated that the disruption in crude oil exports from Venezuela and Libya, Iranian sanctions and OPEC+ production cuts will sustain crude oil at about $70 a barrel, while expecting foreign investors to continue to invest in Nigeria considering 13.5 percent is still high and knowing developed economies are not raising rates in 2019.

But with the crude oil now trading at about $61 a barrel, down from $73 following the fallout between the U.S and China, Nigeria’s foreign reserves would benefit from the likely capital inflows into emerging economies.

This coupled with the foreign reserves currently standing at a record high of $45.2 billion, moderating inflation rate of 11.37 percent and the implementation of the signed N8.91 trillion 2019 budget will give the CBN enough room to adjust to global happenings and still manage the economy effectively without necessarily raising the interest rate.

A situation that would sustain the CBN’s ability to regulate the foreign exchange market through its intermittent intervention.

Still, a clear economic policy is needed to encourage capital inflow given the surged in the risks associated with emerging assets –U.S experts/analysts are already predicting economic recession for 2020.

Therefore, Nigeria’s economy needs to be positioned with a strong economic team and a clear policy path to attract investors ahead of South Africa and other emerging markets with better economic policies.