The naira could come under depreciation pressure following the Central Bank of Nigeria’s decision to cut the Monetary Policy Rate by 350 basis points to 23 per cent, according to Bismarck Rewane, Managing Director of Financial Derivatives Company.

Speaking on Channels Television, Rewane described the reduction from 26.5 per cent as a “jumbo cut”, warning that it could reduce the attractiveness of naira-denominated assets and affect savings and investment flows.

Rewane also highlighted potential benefits of the rate cut for government debt servicing and corporate performance, while calling for stronger fiscal consolidation.

However, he said the 350-basis-point reduction was significant and could weaken the attractiveness of naira-denominated assets to investors.

“So it’s a jumbo cut from 26.5% to 23%, 350 basis points is huge by any stretch of imagination. So that’s a big risk,” he said.

He noted that the immediate reaction in the foreign exchange market had been relatively muted, with the naira trading at around N1,387 to the dollar before briefly weakening to about N1,390 and recovering to around N1,387 in the parallel market.

Rewane said the lower interest rate could put pressure on the naira as declining returns on local assets reduce their attractiveness to investors.

“Effect of a 1% rate cut, return on savings will fall by 0.12 per cent. The stock market, potentially positive,” he said.

He added that increased diaspora inflows could partly offset a potential decline in foreign portfolio investment.

“Diaspora flows will be a substitute for the foreign portfolio investments,” he said.

Rewane said the naira could come under depreciation pressure, although the extent of any decline would depend on broader market conditions.

“…the Naira may depreciate, but not as much …, because the Naira fair value is about 1,150 Naira to a dollar,” he said.

Rewane said lower interest rates could reduce returns for savers and prompt investors to explore alternative assets.

Rewane said the real rate of return for investors had fallen from 11.1 per cent to 7.61 per cent, although it remained attractive to investors engaged in carry trades.

“The real rate of return for investors here dropped from +11.1 to +7.61, it’s still very good for those who involve themselves in carry trade,” he said.

He added that the lower returns could further weaken national savings, which he described as already low.

“Savings are a function of interest rates, very sensitive. You either save or you consume, but the amount, national savings is very low. So when you do this, it falls further,” Rewane said.

 

“The danger is that you may then begin to start to buy alternative assets. Which includes dollars, Bitcoin, we don’t know,” he said.

Rewane said the real rate of return for investors had fallen from 11.1 per cent to 7.61 per cent, although it remained attractive to investors engaged in carry trades.

“Savings are a function of interest rates and are very sensitive. You either save or consume, but national savings are very low. So when you do this, it falls further,” Rewane said.

He added that the lower returns could further weaken national savings, which he described as already low.