Godwin Emefiele, Governor of the Central Bank of Nigeria, announced an increase in the benchmark interest rate (MPR) to a two-decade high of 15.5%.
He made this announcement after the monetary policy meeting on September 26th and 27th, 2022.
The rate increase is a 150-basis-point increase from 14%, and the cash reserve requirement (CRR) has also been increased to 32.5%.
The MPR rise is the fastest in the last 20 years, indicating the CBN’s aggressive move to control inflation as the money supply reached its highest level on record.
The CBN’s Monetary Policy Committee stated that previous rate hikes had already slowed the economy’s money supply rate, implying that the current hike was intended to supplement previous ones.
The MPC noted that a tight policy stance would help consolidate the impact of the last two policy rate hikes, which is already reflecting in the slowing growth rate of money supply in the economy. It also felt that an aggressive rate hike would slow capital outflows and likely attract capital inflows and appreciate the naira.
While the apex bank has emphasized these potential benefits, the rate hike has other implications for the Nigerian economy, as explained in this article.
We also believe that increasing an economy’s benchmark interest rate provides investors with money-making opportunities. Here are a few of the ones we found.
Ask more for your fixed deposits – Aggressive savers should be on the phone right now asking their fund managers to renegotiate their fixed deposit rate.
- While this is on, new investments in fixed deposits should be at a much higher rate than they currently offer you.
- Savers in mutual funds or other schemes that offer fixed returns should also anticipate higher returns on their money.
Look for high bond Yields – As interest rates rise across the country, watch out for bond prices to tank leading to higher yields.
- This is a great buying opportunity for investors with deep pockets as they get to buy bonds at much lower prices than their face value.
- While bond prices may rise shortly after, buying them when yields are high is a great buying opportunity.
Buy the dip with Stock Market – This is not a great time to invest in the Nigerian stock market because we also believe share prices will tank.
- However, being unattractive is just in the short term thus investors who have cash should look out for great Nigerian stocks they can buy at bargain prices.
- We will suggest patience until stock prices have fallen to multi-year lows. Investors will be smart to purchase stocks that offer less than 2x in price-to-earnings ratio and double-digit dividend yields.
- Investing in banks may just be a good short-term opportunity as banks tend to make money from rising interest rates.
Buy Real Estate – Landlords, especially those who do not have mortgages should expect higher rental income due to higher interest rates.
- Developers who borrowed money to build new homes or commercial properties will have to increase the cost of their units forcing buyers to increase rent.
- While rent increases for leveraged developers are a way for them to meet their financial obligations, it is free money for landlords who don’t have loans.
- We also see a potential upside for property developers who are either close to finishing their developments or have properties on the market for sale.
- If the properties are in great locations, they will likely get them for higher prices.
Look out for firesale of assets – We also envisage some developers who cannot meet up with loan repayments may be forced to sell assets under duress.
- There might be a lot of cheap assets to buy as people fire sell so they can service debts and other obligations.
- This creates buying opportunities for people with deep pockets looking for a great bargain.
- Most firesale asset sellers often respond positively to cash and offer generous discounts if the buyer can show proof of liquidity.
Sellers of Geffen goods – These are goods that everyone needs to buy come rain, come shine.
- Sellers of these goods will make more money during high-interest rate environments especially if they have disciplined financial management.
- You should consider venturing into these sorts of businesses in times like this otherwise you might find yourself quickly out of business.
Dollar earners keep winning– While the CBN’s interest rate hike is aimed at curbing Naira depreciation against the dollar, we still believe investing in dollar-based assets is the best hedge.
- The latest decision to hike rates further reinforces the case, which buttresses our narrative over the last few months.
- Opportunities available to earn in forex should be seized as those who do will have even more naira to spend and preserve their purchasing power.
- Suffice it to add that the dollar is the strongest currency in the world at the moment and is eating up other currencies globally.
- Exporters and salary earners in dollars should be in the money by now.
