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Naira faces fresh risk as Fed hikes interest rate by 50bps

By Geoff Iyatse
05 May 2022   |   4:15 am
For the first time in 22 years, the Federal Open Market Committee (FOMC), a rate-fixing committee within the Federal Reserve System, has raised the interest rate by 50 basis points, as a continuation of its aggressive effort to rein in inflation.

[FILES] Naira

For the first time in 22 years, the Federal Open Market Committee (FOMC), a rate-fixing committee within the Federal Reserve System, has raised the interest rate by 50 basis points, as a continuation of its aggressive effort to rein in inflation.

After a marathon meeting that sent jitters across the global market, the Fed also announced its plan to shrink its bold holdings to ultimately scale down its $9 trillion balance sheet.

At the International Monetary Fund (IMF), the Feb Chairman, Jerome Powell, had disclosed that a 0.5 per cent interest rate hike was on the table.

An increasingly hawkish Fed had earlier in the year raised the interest rate by 25bps insisting that it will pursue its two per cent inflation target at any reasonable cost.

Inflation in the United States hit 8.5 per cent in March, the highest since 1981. In Europe and elsewhere, inflation has hit the rooftop with the IMF and the World Bank warning that it has compounded the existing macroeconomic headwinds.

Economists had warned that unrestrained preoccupation with inflation control would trigger a new round of recession as the economy remained vulnerable to the impacts of the COVID-19 now being compounded by the Ukraine-Russian War.

Different reports by the World Bank and IMF also warned that fiscal instability would worsen in developing countries and emerging markets as capital flight will increase following a stronger dollar.

The institutions advised countries with high debt and extremely fragile fiscal positions to increase rates as part of efforts to make their market attractive for foreign capital required for stable reserves.

Last week, the dollar index, which measures the strength of the dollar against other currencies, reached its highest point since 2002 as investors continued to de-risk ahead of the Fed meeting.

As global economies awaited the Fed’s announcement yesterday, the Reserve Bank of India (RBI) also took a radical move, raising the repo rate (the rate at which it lends money to commercial banks) by 40 basis points to 4.4 per cent.

Meanwhile, Nigeria’s benchmarked rate has remained unchanged since September 2020. The Monetary Policy Committee (MPC) maintained during its last meeting that economic growth remained relatively fragile just as inflation, which hit 15.9 per cent in March, is from supply shock and not necessarily caused by money supply.

As the IMF and the World Bank had projected, capital importation may have continued to tumble. At the close of last month, the gross reserves dropped to $39.58 billion. The figures had crossed $39.8 billion in the month.

The exchange has been relatively stable at a moving average of N580/$ in the parallel market and N415/$ at the Investors’ and Exporters’ (I & E) window but experts are concerned about the persistent illiquidity, which the Central bank of Nigeria (CBN) chief, Godwin Emefiele, said only aggressive export earnings would boost.

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