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Increased interest rates: Experts predict mixed fortunes for stock market

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Trading floor of NSE, Lagos

Trading floor of NSE, Lagos

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) recently raised the Monetary Policy Rate (MPR), otherwise known as benchmark interest rate, to 12 per cent from 11 per cent.

It also increased bank’s Cash Reserve Ratio (CRR) to 22.5 per cent from 20 per cent, in a move aimed at tightening liquidity, which the central bank blamed for the current pressure in the foreign exchange market and other factors such as fuel scarcity, increased electricity tariff and persistent insecurity.

Prompted by the mixed reactions, which trailed the CBN’s action, The Guardian sought the opinions of stock market analysts and operators on how the interest rate hike would impact on the Nigerian capital market.

Explaining how interest impacts on the stock market, Okundia Idiaghe, an Abuja-based investment expert, said on phone that when interest rates rise, cost of borrowing money by the listed firms to do their operations would also rise. Such high rates make borrowing more expensive. Companies that need to borrow significant amounts will pay more to do so. This expense tends to hurt returns on capital, and disproportionately hurt stock prices of indebted companies.

“In fact, discerning investors always take a careful look at companies’ accounts to see how much they rely on loans in carrying out their operations. If it is much, no one will be willing to invest in such companies and this will make the prices of the stock of such companies to go down,” he said.

According to him, another negative result of rising interest rates on equities is that shares are assumed to be riskier investments than bonds. So, when interest rate goes up, instead of borrowing fund at high interest to invest in stocks, investors may be more inclined to sell their stocks and channel the proceeds to acquiring assets with guaranteed income streams.

But Austin Bakare, a retired banker, who is now into risk management consultancy, said the negative effect of rising interest rates on borrowed money is actually a positive factor for certain companies like banks, adding that banks make most of their profits from lending money. According to him, because the banks are expected to make more profit this time around, this might stimulate demand for their shares. “So, do not be surprised if their stocks prices start rising,” he said.

He also pointed out that banks might attract more deposits now because as the CBN hiked interest rate, people will prefer to put their money in banks or acquire more of money market instruments because of attractive returns.

He disclosed that insurance companies would also reap from the high interest rate regime, not from the premiums they collect from clients but from investing the premiums at high interest bonds. In view of this, insurance shares tend to go up in time like this, as investors jostle for them because of the anticipated income the companies are expected to make at the end of the year.

Tunde Oyekunle, CEO, Finawell Capital Limited, Lagos observed:

“My curiosity was aroused by the recent increase in the Monetary Policy Rate by the CBN from 11 per cent to 12 per cent in response to the surge in inflation rate that was recorded last month. I opined that rather than increase in money supply in the economy, the inflation surge was majorly due to the impact of the high dollar exchange rate against the naira in the parallel market. Many importers funded their purchases at this high dollar price, leading to the eventual surge in inflation rate.
The decision of the Monetary Policy Committee to increase both the Cash Reserve Ratio (CRR) and the Monetary Policy Rate (MPR) depicts a restrictive monetary policy.

“These are not appropriate measures in a depressed economy that is yearning for breath of survival; coupled with the governmental drive to strengthen the real sector. What the economy needs are expansionary measures that would support government spending from the approved budget in order to stimulate economic activities.”

Oyekunle is alluding to the fact that the hike in interest rates may not augur well for the entire economy including the stock market.



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