Will naira gain on higher interest rates?

The recent decision by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria to tighten further against expectations of a rate pause has sparked discussions about the impact on the Nigerian economy. In a recent interview on CNBC Africa, Egie Akpata, the Chairman of Skymark Partners, shared insights on the implications of the rate hike on the Nigerian financial markets and the Naira's performance. Akpata commended the Central Bank for its decision to increase the interest rates, citing the 50% rise in fuel prices as a significant factor driving the need for the hike to prevent inflation from spiraling out of control. However, Akpata expressed concerns over the drastic increase in the Cash Reserve Ratio (CRR) from 45% to 50%, noting that the move could have far-reaching implications on liquidity in the banking system. He highlighted that the recent Treasury bill rates and the Omo auction results indicated the challenges facing the Nigerian financial markets, with real interest rates still lagging behind inflation rates at around 32%. The discussion also delved into the impact of the rate hike on the Naira, which has been struggling to gain traction against the US dollar. Despite the surge in foreign exchange reserves and increased FX inflows, the Naira has faced downward pressure, reaching as high as 1,667 against the greenback. Akpata emphasized the need for the Central Bank to intervene in the forex market through scheduled dollar sales to stabilize the Naira and create predictability for market participants. He underscored the importance of attracting foreign portfolio investors (FPIs) by offering attractive rates and enhancing the appeal of Naira-denominated assets. Akpata echoed sentiments that sustaining positive interest rates could potentially attract FPIs to invest in Nigerian assets. The recent Omo auction at a record 32% yield signaled a shift in the Central Bank's strategy to make the Naira a more attractive investment destination. Akpata emphasized the importance of consistency in rate policies and transparent communication from the Central Bank to build investor confidence and drive inflows into the Nigerian economy. In conclusion, the outlook for the Naira's performance remains uncertain as market dynamics continue to evolve. The Central Bank's efforts to maintain a balance between interest rates, inflation, and foreign exchange stability will be crucial in shaping the future trajectory of the Nigerian economy. As global economic uncertainties persist, attracting foreign investors and bolstering investor sentiment will be key to supporting the Naira's resilience amidst external challenges.