Higher Interest Rates - Necessary But Not Sufficient to Curb Inflation


Sunday, February 14, 2021 08:00 AM / by FDC LtdHeader Image Credit:Investopedia


It appears the era of low interest rates has finally come to an end. Nominal interest rates are gradually increasing in the Nigerian money markets on tighter liquidity. So far in 2021, the average opening position of banks has fallen by 12.6% to N479.68bn, relative to December's average of N548.85bn. This is on the back of the CBN's increased mopping up activities.


The CBN is seen to be using more of its traditional monetary policy tools such as OMO bills, CRR debits, etc to address price and exchange rate stability while keeping its benchmark interest rate unchanged. The outcome has been an increase in the yields of secondary market OMO bills from as low as 1.5% to a range of 7% to 10.1%1. Also, short term money market rates of OBB and ON have increased to above 10% for the first time since a brief stint in September 2020.



There is an inverse relationship between interest rates and stock prices. As returns on investment (yields) start to increase, there will be a gradual shift from equities to the fixed income market. This is also occurring at a time when corporate earnings are being released. A combination of weak corporate results and a rise in interest rates could be the pin that finally bursts the stock market bubble.


The reduction in naira liquidity and resultant increase in interest rates will reduce the demand for dollars. This is positive for exchange rate stability and should lead to an appreciation of the naira and reduction in imported inflation.

Proshare Nigeria Pvt. Ltd.

Related News - Monetary Policy

1.      Welcome Pick-up in PSCE Growth in December 2020

2.     CBN Deals the House Card as Policy Rates Remain Unchanged

3.     MPC: Carry on for Another Two Months or More

4.     CBN Communique No. 134 of the MPC Meeting - Jan 25-26, 2021

5.     MPC Holds All Policy Parameters at the End of Its First Meeting in 2021

6.     A Compelling Case for Another Hold from the MPC

7.     Pre-MPC January 2021: MPC to Maintain Policy Rates

8.     Monetary and Interest Rate Policy in 2021: Going for Growth

9.     CBN to Sustain Expansionary Monetary Policy Till Q1, 2021 - Cordros Securities

10.  Ten MPC Members, One Shared Outlook

 Proshare Nigeria Pvt. Ltd.

Related News - Inflation

1.      High Year-end Spending Drove Inflation Upward

2.     CPI to Rise by 16.10% YoY in January 2021

3.     Rising Inflationary Pressures Despite Weak Aggregate Demand

4.     Inflationary Pressure Still Straining Pockets

5.     Why Inflation is Important

6.     Inflation Spikes Despite Harvest and Land Border Re-opening

7.     Nigeria's Misery Index Rises as Inflation Reaches 15.75%

8.     Headline Inflation Increases by 15.75% YoY In December 2020, 0.86% Higher Than November 2020 Rate

9.     Headline Inflation to Continue its Runaway Trend in December 2020

10.  Border Reopened After Inflation Spiked

11.   Headline Inflation Increases By 14.89% YoY In November 2020, 0.66% Higher Than October 2020 Rate

12.  Nigeria's Inflation-Galloping Towards 15%

13.  Headline Inflation Climbed Higher in October, Up by 14.23%

14.  October Inflation: A Blip or Trend?

15.  Inflation: Higher Energy Costs Could Compound Spiralling Food Prices

16.  Nigeria's Inflation Maintains Upward Trend Amidst Structural Rigidities

17.  Higher Energy and Food Prices Pushed Headline CPI to 14.23% YoY

18.  Headline Inflation Increases By 14.23% YoY In October 2020, 0.52% Higher Than September 2020 Rate

19.  Is Nigeria Headed for an Era of Hyperinflation?

20. Nigeria's Inflation Rises to 13.71% as Concerns Mounts Up

21.  Headline Inflation Ticked up by 49 bps to 13.71% in September - PFI Capital

22. Another Rise in Inflation Driven by Food Prices

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Related News