Home » How Nigeria’s Central Bank Plans to Tackle Inflation with Higher OMO Rates

How Nigeria’s Central Bank Plans to Tackle Inflation with Higher OMO Rates

A report by Coronation Asset Management predicts that the CBN will raise the rates of its OMO bills to curb inflation in 2024.

by Motoni Olodun

Nigeria’s central bank is expected to raise the rates of its Open Market Operations (OMO) bills this year, as part of its strategy to combat the high inflation rate that has plagued the country for months.

This was the forecast of Coronation Asset Management, a leading investment firm, in its latest report on the Nigerian economy and financial markets.

According to the report, the Central Bank of Nigeria (CBN) increased the yields on OMO bills in the fourth quarter of 2023, allowing the increase in the monetary policy rate to transmit to other fixed-income securities like treasury bills.

The report noted that the adjustment in the rates of OMO and treasury bills was one of the effective ways the CBN, led by Governor Yemi Cardoso, hoped to fight inflation in the country.

With inflation influenced primarily by the extremely high exchange rate value of the naira to other major currencies and the removal of the petrol subsidy, the CBN was hopeful that raising money market rates, which were way below the inflation rate of 28 percent in 2023, would help curb this challenge.

The report also added that since treasury bill rates were likely to be adjusted upwards, investors should also expect a moderate upward adjustment on the rates of all FGN bonds this year.

It said, “Since treasury bill rates influence FGN bond rates, we may be set for moderate FGN bond rates this year, too.”

The report’s prediction was in line with the views of some analysts and experts, who had expressed concerns about the rising inflation rate and its impact on the economy and the people.

According to the National Bureau of Statistics, Nigeria’s inflation rate rose to 28.2 percent in December 2023, the highest level since 1999. The main drivers of inflation were food prices, which increased by 32.5 percent year-on-year, and transport costs, which rose by 27.8 percent.

The high inflation rate had eroded the purchasing power of Nigerians, especially the low-income earners, who spent more than half of their income on food. It also discouraged savings and investments, as the real returns on fixed-income securities were negative.

The CBN responded to the inflation challenge by increasing the monetary policy rate from 11.5 percent to 18.75 percent in 2023, the highest level since 2006. The CBN had also tightened liquidity in the banking system by issuing more OMO bills and reducing the amount of money that banks could lend to customers.

The CBN’s actions resulted in higher interest rates in the money market, as well as a slight appreciation of the naira against the dollar in the parallel market.

However, some analysts have argued that the CBN’s monetary policy alone was not enough to tame inflation and that the government needed to implement structural reforms and fiscal policies that would boost productivity, diversify the economy, and reduce the dependence on imports.

The report by Coronation Asset Management also expressed optimism about the equities market in the first quarter of 2024. It commended the recent 83,000 basis points remarkable achievement in the All Share Index on the Nigerian Stock Exchange.

The report anticipated that this positive trend would continue, particularly with the upcoming season of financial record presentations and dividend payment proposals by quoted companies.

It said, “We maintain that the positive sentiment can be linked to the traditional January surge as well as investors positioning themselves ahead of results and dividends for 2023. Though there may be a correction later on in the year (as in previous years, after January rallies), we expect the surge to continue this month.”

The report concluded that despite the challenges posed by inflation and exchange rate volatility, there were still opportunities for investors to make profitable decisions in the Nigerian financial market.

Source: Business Day


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