The cost of foreign borrowing by the Federal Government and corporates, as well as yield on fixed income securities may rise following the plan by the world’s three biggest Central Banks to update their monetary policy stance, this week Tuesday through Thursday .
The Central Bank of Japan’s monetary policy meeting will hold on Thursday June 14 , and Friday June 15 , the governing council of European Central Bank (ECB) will meet on Thursday June 14 , and the Federal Reserve, U.S. will conclude its two day meeting today. Nigeria’s Central Bank will hold its next Monetary Policy Committee meeting in July 23 and 24 .
Expectations are for the Bank of Japan to hold policy unchanged, the European Central Bank to flesh out its plans to end its bond-buying program currently scheduled to finish in September, and for the Federal Reserve to hike rates.
With unemployment in the U.S. so low, Fed officials could update their projections from three to four rate hikes this year, a move which would further increase pressure on developing-economy currencies, Bloomberg reports.
Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited said the recent improvement in the global economy justifies monetary policy normalisation in advanced countries.
This monetary policy stance he said should cause global yields to rise. “And the implication of this on the Nigerian economy is that domestic yields of fixed income securities may rise causing the Federal Government of Nigeria (FGN) and other corporates to borrow money in the domestic market at relatively higher interest rate than the current level. In addition, the cost of borrowing for the FGN in the international market may rise. The implication of these developments is that the cost of borrowing for the government may rise,” Akinwunmi, told BusinessDay.
Yields on government securities have been easing since September 2017, losing about 300 bps to April 2018 according to Gbenga Sholotan, head of research, Rand Merchant Bank Nigeria Stockbrokers.
The closing prices and yields of US$500 million July 2018 Eurobond remained at US$99.983 and 5.218 respectively, data from Debt Management Office (DMO) indicated.
Nigeria’s total public debt stock is put at N21.725 trillion as at the end of December2017. The Federal Government’s domestic debt at the end of 2017 was N12.589 trillion, according to the DMO.
The Central Bank of Nigeria (CBN) at the last Monetary Policy Committee (MPC) meeting held in May, kept its monetary policy stance at 14 percent, for nine consecutive months, amid slowing inflation rate.
The CBN also kept unchanged the liquidity ratio at 30 percent, Cash Reserve Ratio at 22.5 percent and +200-500 basis point asymmetric corridor around the MPR, hinting that it would not consider easing until inflation fell to single digits.
The U.S Federal Reserve left interest rates on hold in May, but signalled that inflation was nearing its 2% target, and lining up further rate increase at its next meeting in June.
The Bank of Japan (BOJ) maintained its short-term interest rate target at minus 0.1 percent in April 2018. The ECB held interest rates steady on May 2018, amid signs the euro area’s growth outlook may have softened. The ECB’s interest rate on its main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remained unchanged at zero, 0.25 and -0.40 percent respectively.
Nigeria early in the year, sold $2.5 billion of Eurobonds as it sought to lower funding costs by using the notes to refinance higher-yielding naira debt. Nigeria sold a record $4.8 billion of Eurobonds last year, most recently in November, when it issued $3 billion of 10- and 30-year debt.
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