As stated by financial analysts, raising the benchmark interest rate of 24.75% by an additional two percent as purported by the Monetary Policy Committee will only flaw the equity market, making investors uninterested.
On Tuesday, Dr Olayemi Cardoso, the Governor of the Central Bank of Nigeria, who doubles as the Chairman of the MPC, declared the rate hike at the end of the 294th MPC meeting held in Abuja.
Meanwhile, the apex bank retained the Cash Reserve Ratio at 45 percent and also increased the CRR of merchant banks from 10 percent to 14 percent and left the liquidity ratio unchanged at 30 percent.
Expressing surprise over the second consecutive rate hike in weeks, Research Analyst, Parthian Securities Limited, Miss Mercy Okon, said, “To be honest, I was not expecting a rate at this meeting because the market has not fully adjusted to the last rate hike. Also, we have not had the chance to observe the impact of the previous hike on our inflation results and this is because inflation is a lagging indicator. So, the impact would not be seen at least until we start to see the inflation report for April and May.”
Okon noted that the local bourse may continue to see bearish trading patterns as investors seek better yields in the fixed-income market.
“The impact of the recent hike on the equity market is negative and this is because there is a positive correlation between a hike in interest rate and the fixed-income market. This simply means that an increase in interest rates will result in higher rates in the fixed-income market, thereby making the fixed-income market more attractive.
“This will result in investors, especially those with a low-risk appetite, pulling their funds out of the equities market into a safer haven (i.e. the fixed-income market) with guaranteed return plus their principal is safe. So, why should they stay back in the equities market?
“Another adverse impact is on the companies. Already, the business environment is a bit tough on companies, especially in the manufacturing, industrial and consumer goods sectors.”
Okon said, the full-year results shows that a bulk of the firms had a surge in their finance cost and a rise in their operating expenses.
“Now, a hike in interest rate signifies that the cost of borrowing will go up. This simply means that for those companies that intend to further borrow to finance their working capital, this would further increase their finance costs. There is also the impact on an average investor, who might likely have little or no funds to invest in the market as a result of the rising cost of living,” she explained.
Analysts at Cowry Research expected the MPC to maintain “a vigilant stance, closely monitoring inflationary trends as we move into the second quarter of 2024”.
“As part of this proactive approach, it is anticipated that further interest rate hikes ranging between 100 and 150 basis points may be implemented between May and July. Such measures aim to ensure a soft landing for the economy, effectively managing potential inflexion points in inflation while promoting sustainable economic growth,” they noted.
The equity market suffered a N104bn loss at the end of trading as a result of sell-offs, which reduced the market capitalisation to N58.78tn on Tuesday.
Also, on Wednesday the market gained about N188bn at the close of trading also leading to the market capitalisation appreciating by 0.32 percent to close at N58.96tn.
