Naira May Depreciate After CBN’s 23% Rate Cut, Rewane Says

Bismarck Rewane, chief executive officer of Financial Derivatives Company (FDC), says the naira may depreciate after the Central Bank of Nigeria (CBN) cut its benchmark interest rate to 23 percent. But the economist expects the fall to be milder than many fear, citing the naira’s estimated fair value and Nigeria’s still-positive real interest rate.

Rewane spoke on Wednesday during Channels Television’s ‘Business Morning’ programme.

Fair value and carry trade

Rewane said the naira’s fair value is about N1,150 to $1. “The naira will depreciate, but not as much as fear, because the naira fair value is about N1,150 to $1,” he said.

The rate cut has lowered Nigeria’s real rate of return from about 11.1 percent to 7.61 percent, according to Rewane. Still, he argued that the differential remains attractive to foreign investors doing carry trades. “I’d rather have 7.61 positive in Nigeria than have 0.55 negative in the European Union,” he said.

He said the interest rate gap between Nigeria and major economies could continue to support foreign capital inflows despite the cut. However, lower rates could affect foreign portfolio investment (FPI). In his view, diaspora remittances could increasingly serve as a substitute. “The diaspora flows will be a substitute for the foreign portfolio investments,” Rewane said.

Savings, borrowing and fiscal pressure

Rewane warned that the rate cut could weaken national savings as deposit returns decline. “You either save or you consume, but the national savings is very low. So when you do this, it falls further,” he said. “The danger is that you may then begin to start to buy alternative assets, which includes dollars, Bitcoin,” he said.

He put national savings at about N97 trillion, compared with national gross domestic product (GDP) of about N442 trillion. “You need this to be higher because, in the end, savings will give you investment, and investment will give you productivity, and productivity will give you inclusivity,” he said.

On government finances, Rewane said the rate cut would reduce the federal government’s cost of domestic borrowing and lower its debt-service burden. He said the government currently spends about N15.8 trillion on debt service. “Federal government cost of borrowing will fall sharply by about 350 basis points,” he said.

He, however, said lower interest rates must be supported by fiscal consolidation and efforts to block leakages in government finances. “The real issue is not coordination; it is to achieve fiscal consolidation,” he said. “You achieve price stability by blocking leakages, and so the fiscal authorities have their job cut out for them.”

“Monetary policy cannot do it all alone. Monetary policy goals are for price stability. Fiscal goals are for growth, and we have to look at that,” he said.

Inflation outlook

Despite the rate cut, Rewane said inflationary pressures could persist. He projected headline inflation at 16 percent in October. He cited petrol prices, money-supply growth, insecurity and flooding among factors that could push inflation higher.

Rewane said petrol prices could reach N1,400 per litre, while cooking-gas prices could rise to N21,250 in October. Cooking gas sold for about N16,000 in August and N20,000 in September, he said. Higher jet-fuel and transportation costs could also feed into inflation.

The FDC chief said domestic output growth would remain resilient, while exchange-rate stability could help inflation moderate over time.

What it means

For Nigerian businesses and consumers, the signal is mixed. A weaker naira would raise import costs and fuel price pressures. But a smaller depreciation than feared, supported by positive real returns, could limit the damage and keep some foreign capital in the market.