FDC Predicts Hike in Interest Rate at Next Week’s MPC

Dike Onwuamaeze

The Financial Derivatives Company Limited (FDC) has projected that businesses and households would experience limited access to finance as the Central Bank of Nigeria (CBN) was expected to raise its Monetary Policy Rate (MPR) by 50 basis point when the central bank’s Monetary Policy Committee (MPC) meets next week.

The FDC made the projection in its January 2023, edition of the FDC Bi Monthly in which it further projected that manufacturers might pay more in naira terms for their imported raw materials as the constant depletion of the external reserves could lead to a further widening of the Investors and Exporters’ forex and parallel markets’ gap as the exchange rate at the parallel market depreciates.

It stated: “The MPC is set to hold its meeting in January and could likely increase the MPR by a 50 basis points as inflation remains elevated. Whilst this could be a less aggressive move, it is likely to push up short-term rates in the near term.

“The CBN’s hawkish stance is expected to tighten liquidity in the system and keep the general interest rate elevated. This will lead to a high cost of borrowing and limited access to finance for individuals, corporations and the government. It also raises the risk of default on loans for financial institutions which can push up impairment costs.”

The FDC further forecasted that Nigeria’s, “external reserve is expected to decline in the short term in 2023 owing to the decline in oil and gas prices, which are the country’s major exports.”

The implication, according to the FDC, was that, “this could lead to foreign exchange rationing and discourage the CBN from increasing forex supply to industries and firms that rely on foreign exchange to finance their business activities.”
It added that oil price was expected to likely trade below $90 per barrel in the near term due to the surging cases of COVID in China and recession fears that would help to cool off prices.

“The impact of the decline in oil prices (will be) a bad omen for Nigeria, as this could lead to a narrowing of its trade surplus owing to the decline in its export earnings. This could increase forex restrictions and rationing in the foreign exchange market.

“Consequently, this is likely to stoke inflation as manufacturers pay more in Naira terms for their imported raw materials.
“Generally, the outlook for 2023 shows that the headwinds will linger as upward risks to inflation and downward risks to growth persist. We have less than 25 days to the deadline for disallowing the use of the old currency notes as legal tender. Yet, the new notes are not available for transactions.

“If the CBN proceeds to implement the new policy at the earlier scheduled date of January 31, transactions and economic activity will be largely constrained. We expect inflation to begin to decelerate in the coming months while the CBN moderates the pace of interest rate hikes.

“Oil production will improve to 1.4 mbpd – 1.5 mbpd in January as FGN intensifies efforts to ramp up production and subdue oil theft.”
However, the oil price was expected to remain elevated and would continue to trade above its pre-war levels but would not test the 2022 peak. Short-term interest rates were expected to decline further as the money supply bulges.

“We also expect FAAC to trend upward on increased tax returns and improvements in oil earnings. With the supplementary budget passed, we expect more releases for capital projects, thereby spurring up government spending,” the FDC stated.
The FDC also explored and analysed in detail the economic opportunities in plastic waste management, food sustainability, and other topical global and domestic issues that could impact the Nigeria economy.