Home » Nigeria’s surging money supply defies rising interest rates

Nigeria’s surging money supply defies rising interest rates

by Azeez Buki

Despite the Central Bank of Nigeria’s (CBN) efforts to combat inflation and tighten liquidity by raising the benchmark interest rate, Nigeria’s money supply witnessed a substantial increase, reaching a record N64.3 trillion at the end of the first half of 2023.

This surge, amounting to a whopping N8.8 trillion in just one month, according to a report released at the weekend by Comercio Partners, has raised concerns about the effectiveness of the Monetary Policy Committee’s (MPC) interest rate hikes in curbing inflation.

The CBN’s decision to hike the benchmark interest rate to 18.75% was driven by soaring inflation rates, reaching 22.79% in June
2023 – the highest since September 2005.

The report noted that despite successive interest rate increases over the last 14 months, inflation continued to surge, raising concerns about the effectiveness of such monetary policy measures. The rise in interest rates aimed to narrow the negative real rate of returns and attract foreign investments but has
seemingly failed to address the inflationary pressures and the growing money supply.

“The escalating money supply poses challenges for the bond market. With a higher money supply, investors may become concerned about the potential erosion of their purchasing power,
leading to increased demand for assets that may generate less negative yield. In response to surging inflation, the CBN may be prompted to issue more high-yield bonds to attract investors,” the report said, adding that “this could lead to increased borrowing costs for the government, impacting its fiscal policies and possibly widening the budget deficit.”

It state that the surging money supply might also influence the equity market. With more money available in the economy, consumers may have higher purchasing power, potentially driving increased
consumption and demand for goods and services. This could positively impact companies’ earnings, leading to potential stock price appreciation. However, the risk of higher inflation and rising interest rates may also prompt investors to seek alternative investment options, leading to volatility in equity markets.

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