Sep 25 (Lagos) - In a move that caught investors off-guard this week, the Central Bank of Nigeria (CBN) slashed interest rates by 100 basis points bringing the MPR to 11.5%. Given how inflation has been above target since 2015, rates were expected to remain unchanged for the rest of 2020 and possibly early 2021.
The question on the mind of many is whether the rate cut will achieve the desired effect by stimulating consumption and economic growth? Ongoing border closures and disruptions created by COVID-19 have pushed inflation to levels not seen since March 2018 above 13.20% while a drop in the production and price of Oil continues to rub salt into the wound. While looser monetary policy could support growth, it may come at the cost of rising inflation and weaker Naira.
Over the past few months, central banks across the globe have deployed unprecedented measures to defend their respective economies against the coronavirus menace. However, fiscal policy has been identified as the sharper tool with governments across the world providing a critical lifeline to keep the wheels of their respective economies rolling.
Outside of Nigeria, King Dollar made a return by appreciating against every single G10 currency. In times of uncertainty, everyone wants a juicy piece of the world’s most liquid currency. As coronavirus cases rise in Europe and other parts of the world, the flight to safety is likely to boost appetite for the Dollar. This is bad news for many emerging markets currencies, especially those with high Dollar-denominated debt.
On the commodity side, Oil prices remain heavily influenced by demand-side factors and the state of the global economy. Prices are likely to remain stuck around the $40 regions in the near term, especially If another round of possible lockdowns hit Oil demand. Looking at the technicals, WTI Crude is under pressure on the daily charts. If prices are unable to break away from the sticky $40 regions, the next key point of interest remains around $38. A weekly close above $41.50 could pave a path towards $43.
reporting for easykobo.com on Friday, Sep 25 2020 from Lagos, Nigeria
Source - written by Lukman Otunuga, Senior Research Analyst at FXTM.