CBN may increase interest rate this year, says report

A new report has said likely stronger dollar demand will convince the Central Bank of Nigeria of the need to tighten monetary conditions as with the trend across global central banks to manage foreign exchange reserve depletion.

Sigma Pensions said this in the report titled ‘Nigeria 2022 outlook: Consolidating on recovery but persisting large imbalances present headwinds’.

According to the report, the large fiscal borrowing requirements amid less liquid financial system conditions in 2022, relative to the last two years, suggest ample scope for heightened market expectations about higher interest rates.

It said, “We expect the oil sector to exit recession in 2022 as Nigeria’s crude production rebounds from the 1.6mbpd low base in 2021 towards a range of 1.8-1.85mbpd and as most OPEC+ curbs are removed by May 2022.

“Given our price and production expectations, we expect Nigeria’s external balance to improve as oil export receipts normalise to trend levels amid persisting import demand suppression on account of the CBN’s currency policy.

“We expect Nigeria’s economic growth to stabilise around 3.4 per cent in 2022, reflecting improvements across telecoms, trade, manufacturing, and oil.”

According to the report, a large fiscal borrowing plan and higher political risk premiums are expected ahead of the 2023 general elections.

It said, “Furthermore, likely stronger dollar demand will convince the CBN of the need to tighten monetary conditions as with the trend across global central banks to manage FX reserve depletion. Against this backdrop, we think the current bearish trends in the fixed income market will likely persist over 2022.

“For equity markets, we see bearish trends dominating market sentiments as the fixed income optionality becomes available to investors after a two-year hiatus and as political risk premiums on Naira risk assets heighten ahead of the 2023 general elections.”

The company expects the domestic institutional investor support in bellwether names to continue to curtail downside to the overall market.

It said, “Despite the emergence of new variants of the COVID-19 virus, we view higher vaccine coverage and the existence of drugs as supportive of further normalisation in global economic activity in 2022.

“Rising inflation expectations from a mix of supply bottlenecks and stimulus fueled demand is likely to drive a withdrawal of global monetary stimulus and incite interest rate hikes which will underpin higher US dollar interest rates.”