Investors Weigh Impact of US Rate Hike

  • Investors Weigh Impact of US Rate Hike

Investors are weighing the possible impact of the increase in the United States’ benchmark interest rate as against expected returns on their investments in Nigeria.

Prior to last week’s rate hike in the US, financial and economic experts had said the return of foreign portfolio investors to Nigeria was being threatened by the rising interest rates in the US.

The US Federal Reserve, on Wednesday, voted to raise the target for its benchmark interest rate by 0.25 per cent, citing solid economic expansion and job gains.

The widely-anticipated decision will lift the target for the central bank’s benchmark rate to a range of 1.75 per cent to two per cent, the highest level since 2008.

A majority of Fed officials also forecast two more rate rises this year, one more than previously predicted, according to the British Broadcasting Corporation.

The rise is part of the US recovery following the global financial crisis. It is the seventh time the bank has raised rates since 2015.

Analysts said the higher rates in the US had contributed to turmoil in some emerging markets, where low rates had prompted investors to pour in money in recent years in search of returns.

The Managing Director, Afrinvest Securities Limited, Mr Ayodeji Ebo, in a telephone interview with our correspondent, noted that the US rate hike was in line with expectations.

He said, “So, we don’t expect any knee-jerk reaction or sudden capital flow reversal. In the last one or two months, we have seen sell-offs across emerging markets; so, we don’t expect any major impact as a result of this hike because it had been anticipated. So, I don’t see it affecting the equities market.

“But as we go into the end of the year, the combination of elections and higher interest rates in the US would result into reduction of exposure of portfolio investors to Nigeria.”

The naira is seen flat at about 361 per dollar this week as investors weigh the impact of monetary tightening in United States against expected returns from holding local treasuries, Reuters quoted traders as saying.

Nigeria saw an exodus of foreign investors after the steep fall in the price of crude oil from mid-2014 triggered a currency crisis and the first recession in 25 years.

But the total value of capital imported into the country rose in the third quarter of last year, for the first time since the fourth quarter of 2015, following the emergence of the economy from recession in the second quarter of last year. The rise was driven by portfolio and other investments.

“Rising US interest rates and the consequent narrowing of the interest rate differentials with Nigeria, where yields on sovereign securities are falling, pose a threat to the resurgence of portfolio inflows into Nigeria,” an Associate Professor and member of the faculty at the Lagos Business School, Dr Doyin Salami, said last month.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya

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