SUN, AUGUST 13 2023-theGBJournal |Despite the Central Bank of Nigeria’s (CBN) efforts to combat inflation and tighten liquidity by raising the benchmark interest rate, Nigeria’s money supply witnessed a substantial increase, reaching a record N64.3 trillion in June 2023.
This surge, amounting to a whopping N8.8 trillion in just one month, has raised concerns about the effectiveness of the Monetary Policy Committee’s (MPC) interest rate hikes in curbing inflation.
The CBN’s decision to hike the benchmark interest rate to 18.75% was driven by soaring inflation rates, reaching 22.79% in June 2023 – the highest since September 2005.
Despite successive interest rate increases over the last 14 months, inflation continued to surge, raising concerns about the effectiveness of such monetary policy measures.
The rise in interest rates aimed to narrow the negative real rate of returns and attract foreign investments but has seemingly failed to address the inflationary pressures and the growing money supply.
The escalating money supply poses challenges for the bond market. With a higher money supply, investors may become concerned about the potential erosion of their purchasing power, leading to increased demand for assets that may generate less negative yield.
In response to surging inflation, the CBN may be prompted to issue more high-yield bonds to attract investors. This could lead to increased borrowing costs for the government, impacting its fiscal policies and possibly widening the budget deficit.
The surging money supply might also influence the equity market. With more money available in the economy, consumers may have higher purchasing power, potentially driving increased consumption and demand for goods and services.
This could positively impact companies’ earnings, leading to potential stock price appreciation.
However, the risk of higher inflation and rising interest rates may also prompt investors to seek alternative investment options, leading to volatility in equity markets.
The recent surge in money supply despite the CBN’s hawkish stance on interest rates suggests that raising rates alone might not be sufficient to tighten liquidity and control inflation.
The increase in money liquidity, currency in circulation, and credit to both the government and private sector indicate that other factors are contributing to the expansion of the money supply.
Therefore, the CBN may need to reevaluate its monetary policy toolkit and consider alternative measures to achieve its inflation-targeting goals.
While the interest rate hikes aimed to curb inflation and attract foreign investments, they seemingly failed to rein in the expanding money supply.
This situation poses challenges to the bond and equity markets, impacting government borrowing costs, fiscal policies, and investor behavior.
As Nigeria faces economic challenges, policymakers may need to explore additional measures to address inflation and stabilize the financial markets effectively.-with Comercio Partners analysts
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