Why CBN Adopt Aggressive Monetary Hawkish Stance


Monetary policy normalisation has continued to gather pace across the global economy as several Central Banks have hiked their benchmark lending rates this year.

Led by the U.S., the Federal Open Market Committee (FOMC) has voted to raise rates by a cumulative 292bps range of 3.0 per cent – 3.25 per cent. The BoE has followed suit, raising rates to 2.3 per cent, its highest since 2008.

Also, the ECB has reversed its 8yr. negative interest rate policy, hiking rates to 0.8 per cent with medium-term expectations of raising it to 3.0 per cent.

These continued hawkish stances have forced emerging and frontier markets to respond and defend fund flows. Nigeria, for instance, has hiked its Monetary policy rate by 400bps this year to 15.5 per cent.

Following the Russia-Ukraine conflict and the following sanctions placed on Russia, energy, transportation, and commodity prices spiked, fueling inflation globally.

Before the conflict, we already had expectations for aggressive monetary policy tightening following the accommodative stances adopted by major central banks in 2020 and 2021.

Additionally, supply-chain disruptions remain in demand-supply disequilibrium. To curb inflation, major central banks have tightened their monetary policies.

The high investor risk aversion has led to capital outflows from developing economies, triggering currency depreciation, bearish equity markets and high-risk premiums in bond markets.

We expect the global central banks to continue aggressive monetary stances. U.S. Fed’s median forecast indicated it could raise interest rates as high as 4.6 per cent in 2023.

Thus far in 2022, the CBN has reacted to the aggressive monetary stances abroad by tightening benchmark interest rates by a cumulative 400bps to restrict capital flight, attract FPIs and curb inflation.

These actions will ultimately constrict domestic credit access and shrink liquidity in the medium term.

These have led to an uptick in yields of Naira fixed income instruments. In the Eurobond market, we expect Nigerian Eurobonds continued sell-offs as investors jetty to safe and higher yielder instruments offshore.

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