Fitch projects CBN will raise interest rates further in Q2 2024

Global credit rating agency, Fitch Ratings has projected that the Central Bank of Nigeria (CBN) would further raise interest rates in the second half of the year 2024.

This projection was contained in the ratings firm’s recent credit outlook report for Nigeria, which noted that as a result of recent changes to the monetary system and the oil and gas industry, the nation’s sovereign credit default outlook was upgraded from stable to positive.

The apex bank had raised the interest rate by 200 basis points from 22.75 per cent to 24.75 percent amid soaring inflation.

According to the report, the CBN conducted open market operations at rates that were more in line with the Monetary Policy Rate MPR following the interest rate hike in the first quarter of the year.

Furthermore, the agency projected inflation- the major target of the MPR hike by the CBN is expected to moderate to 26.3% later this year and 18.2% by next year.

It said: “Fitch anticipates further increases in the CBN monetary policy rate in 2H24 (following the 600bp hike to 24.75% since February 2024 alongside tightening of reserve requirements) and strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR.”

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“We project inflation, which rose to 33.2% y-o-y in March due partly to exchange rate pass-through and rising food prices, to average 26.3% in 2024 and 18.2% in 2025, still well above our projected ‘B’ median of 4.5%.”

The report further listed factors that could, individually or collectively, lead to negative rating downgrade.

Some of the factors listed include heightened external liquidity stress, higher risk of debt servicing difficulties stemming from a widening fiscal deficit and greater macro instability.

“Heightened external liquidity stress, potentially illustrated by a deterioration in the CBN’s net FX position, for example, due to severely constrained external financing sources, failure to push ahead with exchange-rate reforms contributing to capital outflows or banks not rolling over FX swaps with the CBN, and/or sustained lower oil receipts

“Higher risk of debt servicing difficulties, for example, stemming from a widening fiscal deficit, failure to put the interest/revenue ratio on a downward path, weaker demand for domestic government debt, and constrained access to Eurobond financing.

“Greater macro-instability in the form of more entrenched high inflation or high GDP growth volatility, potentially due to renewed greater central bank fiscal financing, looser monetary policy settings, and the re-emergence of FX shortages in the economy” the report stated.

By: Babajide Okeowo

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