CBN may defy bandwagon on interest rates with new expansion

• Fiscal policy measures could be a temporary relief

The growing sense of unease and fear over how badly the coronavirus outbreak will hit the global economy has left financial markets on edge as Central banks across the world are pulling the trigger on monetary interventions, seeking to shield their respective economies from the virus outbreak.

Already, Central Banks across the world are enforcing emergency measures to protect their respective economies, with the United States’ Federal Reserve cutting interest rates to zero on Sunday.

With the rising uncertainty, experts in Nigeria’s financial sector have said the unanimous decision by Central banks’ to cut interest rates by 50 basis points is symbolic, as lower interest rates are unlikely to encourage companies to invest, or households to save less amid the health crisis.

The experts stated that with global easing building momentum, Central banks in emerging markets are already taking safety measures, noting the optimism of the Central Bank of Nigeria (CBN) making a move for safety.

According to them, the Bank of England (BOE) has joined the ranks by launching its first emergency interest rate cut since the beginning of the financial crisis by 50 basis points. They noted that the chances of CBN cutting interest rates are slim.

Specifically, Senior Research Analyst at FXTM, Lukman Otunuga, said the CBN at this point, is unlikely to cut interest rates despite the wave of global easing, noting that the plunge in oil prices have placed Nigeria, Africa’s largest economy on a perilous path filled with uncertainty and danger.

According to him, given how the widening coronavirus outbreak is set to trigger more supply-side shocks, fiscal policy measures could act as a temporary pain reliever before a cure is found.

He said that with WTI Crude and Brent both trading over 45 per cent lower since the start of 2020, it would likely hit Nigeria’s foreign exchange reserves and raise speculation around a possible Naira devaluation, as the 2020 budget has set oil benchmark at $57 with an oil revenue goal of N2.64 trillion.

“As the MPC meeting looms, investors are questioning what steps the CBN can take to support Nigeria’s fragile recovery and shield it from the virus outbreak. With inflation rising for five consecutive months to 12.13 per cent in January and expected to rise further, the CBN could go against the grain by enforcing an interest rate hike if consumer prices accelerate.

“There is little room for the central bank to cut interest rates. Instead, CBN may implement more unconventional tools to stimulate the economy, “ he said.

Speaking further, Otunuga noted there seems to be little faith over the effectiveness of monetary policy to counter the damage inflicted by the coronavirus outbreak and this sentiment continues to be reflected across financial markets.

He maintained that lower interest rates are unlikely to persuade businesses to invest, or households to save less amid the health crisis. With fiscal measures seen as a better alternative to stabilising conditions, he noted that governments would be under the spotlight moving forward.

Another question is whether severely depressed oil prices will force the central bank to devalue the Nigerian Naira. This has raised concerns among professionals but the CBN has come out to address the public, telling them to disregard such thoughts.

Oil prices have depreciated over 50 per cent since the start of 2020 amid the coronavirus outbreak and the raging price war between Saudi Arabia and Russia. Foreign exchange reserves in Nigeria decreased to $36.38 billion in February and may drop further if oil prices fail to recover.

Earlier in 2020, Governor, CBN, Godwin Emefiele mentioned that if external reserves drop to between $30 billion and $25 billion, and oil price falls between $50 – $45, the CBN could consider moving on to float the exchange rate and devalue the naira.