CBN Sticks Script, Nato Summit in Focus

Lukman Otunuga

Central banks across the globe have waged war against soaring inflation.

The Federal Reserve raised interest rates for the first time since 2018 last week, the Bank of England hiked rates for the third consecutive meeting in March while the SARB is expected to take action this afternoon. While central banks across the globe are armed and ready, the Central Bank of Nigeria remains on the sidelines.

As widely expected, interest rates in Nigeria were left unchanged at 11.5% as the CBN focused on boosting economic growth during a fragile period. Africa’s largest economy is currently battling gasoline shortages, weak infrastructure, and rising imported inflation among other negative themes. Raising interest rates in such an environment could do more damage than good. With inflation at 15.7% in February, this is still well above the CBN’s 9% target.

However, this is still an approvement from the levels seen back in 2021. If inflation continues to slow in Africa’s largest economy, this could encourage the CBN to remain the status quo on interest rates. However, with the general elections next year and the Ukraine-Russia conflict pushing commodity prices higher, this could revive inflationary pressures in Nigeria.

Keeping our focus on Africa, markets widely expect the SARB to raise interest rates to 4.255 this afternoon. The key question is how many rate hikes can the SARB pull off in 2022 without impacting economic growth? Ongoing tensions between Ukraine and Russia remain a source of uncertainty with soaring commodity prices likely to translate to renewed prices pressures. 

Will the SARB be forced to raise rates by another 3-4 times in 2022 if inflation fails to moderate or adopt a more cautious approach down the road? It is worth keeping in mind that a rate hike will boost borrowing costs, hit business investment, and potentially impact consumption if households are left with less disposable income. If consumer confidence takes a hit, this may hit economic growth.

Outside of Africa, the major risk event could be today as Joe Biden attends an emergency NATO Summit on Ukraine, as well as a G7 meeting. The conflict between Ukraine and Russia continues to sap investor confidence and fuel concerns over the global economy. There is a thick smog of uncertainty created by the military conflict with fears of further escalation leaving investors on edge.

If tensions escalate, this could send shockwaves across global financial markets sending investors rushing towards safe-haven assets like the dollar and gold. Should the emergency NATO meeting conclude on a positive note and revive optimism about peace talks between Russia and Ukraine, this could drag the dollar lower as “risk-on” returns.

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Lukman Otunuga, Senior Research Analyst at FXTM

March 24, 2022