By Faith abule, Abuja
The U.S. Federal Reserve’s cut to its interest rates of 0.5 per cent may influence decisions of Nigeria’s Monetary Policy Committee (MPC), which is to meet next week to discuss potential rate adjustments in the country.
The aggressive reduction in borrowing costs follows rising concerns about the state of the U.S. job market.
This in its latest statement released by the Federal Open Market Committee (FOMC) expressed greater confidence in inflation moving steadily towards its 2 per cent target.
The committee believes that risks to meeting both inflation and employment objectives are now more balanced.
However, not all officials agreed—Governor Michelle Bowman preferred a smaller 0.25 per cent cut.
The Fed’s projections indicate further cuts, with another 0.5 per cent reduction anticipated by the end of 2024, a full percentage point drop in 2025, and a final 0.5 per cent cut in 2026.
The long-term federal funds rate is expected to settle between 2.75 per cent and 3.00 per cent, a slight upward revision from previous expectations.
Fed Chair Jerome Powell explained, “This action underscores our increasing confidence that, with proper adjustments to our policy, the labour market can remain robust while inflation steadily declines toward our 2% target.”
With the Fed lowering borrowing costs, Nigeria’s central bank might feel pressured to follow suit, especially as it balances inflation concerns with the need to stimulate economic growth.
The Fed’s move could also attract foreign portfolio investments (FPIs) back into Nigeria. In times of lower global interest rates, investors tend to seek higher returns in emerging and frontier markets like Nigeria. This inflow of foreign capital could boost Nigeria’s financial markets and strengthen its economy.
For the naira, a weaker dollar resulting from lower U.S. rates could help stabilize the exchange rate. With a softer dollar, Nigeria might experience less pressure on its currency, offering some relief after prolonged depreciation.
Additionally, lower global interest rates can stimulate both private and public sector spending, potentially driving up global economic activity.
This could lead to increased demand for Nigerian crude oil, providing a further boost to foreign exchange inflows and economic growth.
However, while the potential benefits are clear, inflation remains a significant challenge for Nigeria. Imported inflation has already reached double digits, and while lower rates may lead to cheaper imports, this could create more competition for local businesses.
As foreign goods become more affordable, Nigerian businesses might face increased pressure from imports, impacting their profitability and market share.
