Weighing interest rate decisions in Nigeria & Ghana

The recent measures taken by the Nigerian Monetary Policy Committee, though viewed as modest by some analysts, have had a notable impact on the markets. The committee's decision to tighten the asymmetric corridor by 400 basis points has resulted in a signal to banks to place their deposits with the central bank at 15.75. However, there is a cap on the amount banks can place with the central bank, set at 2 billion. Any excess amount beyond this limit will be placed in the markets, affecting interest rates. The expectation of a cash reserving policy has also contributed to pushing interest rates higher. The central bank's commitment to addressing inflation by utilizing all available measures has led to market sell-offs, causing rates to rise. Despite these efforts, some analysts argue that the current tightening measures may not be sufficient to curb inflation effectively. The delicate balance between driving economic growth and controlling inflation remains a challenge for the monetary authorities in Nigeria, especially given the recent removal of subsidies, which has led to an increase in petrol prices and a weakening exchange rate. Foreign investors are looking for more aggressive measures, such as increased supply of open market operation securities, to attract investments and stabilize the currency, ultimately leading to lower inflation rates. Moving on to Ghana, the country faces similar challenges as it navigates high inflation rates and attempts to manage its debt issues. The recent rate hike in Ghana reflects the need to address inflation, but the country must tread carefully due to the significant impact interest rate adjustments can have on its economy. Ghana's inflation rate stands at approximately 40%, with exchange rate pressures adding to the complexity of the situation. While the market had hoped for an appreciation of the Ghanaian currency following previous adjustments, inflationary pressures have prevented this outcome. It is essential for Ghana to increase interest rates to mitigate these challenges, although issuing bonds may be challenging given the current economic climate. The dynamics in both Nigeria and Ghana are further complicated by fluctuations in oil prices. While higher oil prices can boost government revenue in Nigeria, the removal of subsidies and continued reliance on imported petroleum products present challenges. The Nigerian government has expressed its commitment to avoiding a return to the subsidy regime despite potential price hikes. Strategies to enhance security and attract investments in the oil sector are crucial to maximize the benefits of increased oil revenues. The devalued currency and rising oil revenues in Nigeria may lead to increased inflationary pressure, necessitating effective fiscal and monetary policies to maintain stability. The government's initiatives to provide palliatives and drive economic growth, coupled with the central bank's efforts to enhance FX liquidity, are essential for stabilizing the currency and mitigating further depreciation. Achieving sustainable currency levels will be pivotal in harnessing the full potential of increased oil revenues and fostering economic stability.