The United States (US) Federal Reserve is expected to raise interest rate to about 0.7 percent this week which could further weaken capital inflows into emerging markets like Nigeria, put pressure on the already struggling naira and increase government’s foreign debt servicing cost in naira, analysts say.
David Oppedahl, senior business economist at the Federal Reserve Bank, Chicago, said interest rate is expected to increase this week. Receiving a group of Nigerian journalists who visited his office, Oppedahl said the Fed’s benchmark interest rate in 2017 is expected to rise to 1% while it would be getting up to 3% in 2019.
He noted that the outlook is that the U.S economy will expand through to 2019, adding that the shrinking slack in the economy would help inflation rate gradually rise toward 2%.
Responding to the development, Eronmosele Aziba, investment research, Afrinvest Securities limited, said an expected impact from a hike in rates is a reversal in capital inflows into emerging markets and Nigeria is not excluded.
Some of the potential impact on Nigeria include, reduction in the already weakened capital inflows into the Nigerian markets, weakening of the domestic currency against the dollar, which will increase government’s foreign debt servicing cost and further strain already thinned government foreign revenue.
Aziba also said the sovereign rating of the country could be pressured in the event of a default and that this would impede government’s ability to source for foreign denominated loans. The reverse capital outflow is also likely to result in a weaker performance of the Equities market, as foreign participation will reduce.
“Despite these, we believe that investors have somewhat already priced in expectation of a rates hike in their investment decisions, hence the impact of a rates hike may be lessened”, Eronmosele said in an emailed response to BusinessDay.
Robertson Charles, Renaissance Capital’s Global Chief Economist, does not anticipate any impact of the expected U.S interest rate hike on Nigeria. He said in an emailed response, “foreign investors are not involved in Nigeria, owing to exchange rate problems – so the country is isolated from global markets at present”.
David Denis, senior chair and professor of business administration, University of Pittsburgh, USA, explained that, “It is always difficult to predict the economic impact of Fed actions.”
Denis added that the Fed generally keep rates low when they believe that low rates are necessary to stimulate the economy through corporate investment.
“They raise rates when they start to get worried that the economy might get overheated, and therefore inflate prices too much. If that happened, inflation would harm economic growth, so the Fed might raise rates in order to avoid inflation.
“In theory, therefore, the Fed changes rates to try and keep the economy on an even keel. It is difficult to do, however, so sometimes you will see some short-run effects.”
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