One of the worst-performing currencies in the world this year may receive much-needed respite from a potential rate cut in the US.
Since the local unit floated last June, leaving the currency up to market forces, the value of Nigeria’s naira has been under pressure, falling by about 100%.
However, the most recent indication of a rate drop from US Federal Reserve Chairman Jerome Powell at the Jackson Hole symposium on Friday, August 23, 2024, might be the break the battered naira needs.
For the eighth day in a row, the Federal Reserve System’s monetary policy committee, the Federal Open Market Committee (FOMC), has kept interest rates unchanged. Therefore, decreasing the monetary policy rate in the upcoming months is impossible, given that US inflation is within the Fed’s target range.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” stated the 71-year-old. “Time has come for policy to adjust,” he continued.
US Treasuries surged as the dollar declined in response to Powell’s indications of a rate drop. This suggests that investors were bracing for lower interest rates, which often boost bond values while depreciating the dollar relative to other currencies.
According to statistics from Thompson Reuters, the dollar index—which compares the value of the US dollar to a basket of six currencies, including the euro and yen—was undermined by the rise in those two currencies.
The index, which had been somewhat stronger before Powell’s speech, dropped 0.81% by late Thursday to close at 100.64.
This action may provide some respite for the battered naira, whose depreciation due to recent policy changes and economic difficulties has raised inflationary pressures and living expenses for many Nigerians.
A financial expert based in Lagos stated, “A weaker dollar could help ease some of the pressures on the naira,” emphasizing that lower US interest rates make the dollar less appealing to investors, which causes the currency to depreciate.
To date, the Central Bank of Nigeria (CBN) has remained aggressive in carrying out its objective to attain price stability. In less than a year, it increased the benchmark interest rate by a total of 800 basis points to 26.75%.
On August 6, the apex bank made the largest single-day intervention under new governor Olayemi Cardoso when it sold a record $815 million directly to companies ranging from manufacturers to airlines to maintain stability in the foreign exchange market.
The naira has scarcely moved, closing at 1,570.14 per dollar on Friday at the Nigerian Autonomous Foreign Exchange Market (NAFEM) despite efforts by the Abuja-based bank to support the local currency, according to statistics from the FMDQ Securities Exchange Limited.
Ibrahim Bakare, a professor of Economics at Lagos State University, noted that the naira might see some appreciation or at least a slowdown in its depreciation if the dollar weakens as a result of the Fed’s actions, stressing that this could provide some respite to Nigeria’s economic crisis.
Reuters surveyed economists, meanwhile, are upbeat that the FOMC would cut rates by 25 to 50 basis points during its sessions in December and September.
If the Fed were to make a change in September, it would be a departure from the tight interest rate strategy that it has been implementing since it began raising rates in March 2022 to combat inflation. The fed funds target range would then rise from roughly zero to 5.25%–5.5%, where it has been since July 2023.
The dollar has been falling in recent weeks, according to Tobi Ehinmosan, a macroeconomic analyst with Lagos-based FBNQuest Capital, who stated that “the signal of a rate cut, potentially in September has created a lot of optimism in the market.”
“What we don’t know now is the rate or speed at which the Fed will lower rates. Personally, I believe they will cut interest rates slowly while continuing to monitor incoming data and price movements,” said the fixed-income analyst.
US Fed rate reduction could reduce inflation
In addition to providing the weak naira with some respite or stability, the possible rate decrease is also anticipated to drive down prices, particularly for imported items.
Nigeria is grappling with an almost three-decade-high inflation rate of 33.40 percent in July. The rate is far higher than the CBN’s ideal rate, even though prices have decreased for the first time since late 2022.
A US rate cut might offer “the appropriate backdrop” while the exchange rate stabilizes, according to Renaissance Capital Africa CEO Samuel Sule.
Because Nigeria depends so heavily on imports, Ehinmosan said that a declining dollar would give people hope for a break and lower the cost of imports.
“We all know that the currency rate has a substantial impact on Nigeria’s core inflation basket. As a result, a higher naira would have a beneficial impact on Nigeria’s inflation rate,” the macroeconomic and fixed-income analysts stated.
