Market operators have lamented the recent decision of the Monetary Policy Committee (MPC) to raise the interest rate to 13 per cent, saying it will impact the stock market.
The operators argued that the hike in interest rate would depress investors’ appetite for equities shortly and undermine the bullish outlook of the market.
They argued that failed monetary policy had unwittingly expanded the money supply in the battle to exit recession while structural impediments that have stifled production and trade combined with excess liquidity exacerbate inflation.
The operators argued that in portfolio management, there is an inverse relationship between interest rate and the stock market.
According to them, when the interest rate is low, speculators move their funds from the money market instruments to the stock market for higher yield, just as they move from the stocks to other asset classes, especially fixed income securities when the interest rate is high.
Therefore, they suggested that government should adopt measures to stimulate the supply side of the economy to increase output.
Managing Director of Valmon Securities Limited, Tajudeen Olayinka, said the CBN has not demonstrated sufficient capacity to manage excess liquidity in the system.
He pointed out that the interest rate hike would naturally shift investors’ attention to fixed income securities until the market gets saturated with excess liquidity, forcing yields to subsequently come down.
“If you have been following the two markets, you will see clearly that equity prices came down after the announcement of 13 per cent MPR on Tuesday before it subsequently recovered yesterday. The recovery came very swiftly because of the liquidity overhang.
“There is an inverse relationship between interest rate and equities and bond prices, such that when the interest rate goes up, bond and equity prices come down,” he said.
He said the rise in yields attracts more investors’ participation in the fixed income market and the overall economy, as money flows in. He, however, added that this development brings back a new round of liquidity surplus, forcing yields on fixed-income securities to drop due to the low absorptive capacity of the economy and poor handshake between monetary and fiscal policies.
Olayinka pointed out that the scenario is not always the case in more developed markets as they are ever ready to deploy all weapons of liquidity management to the advantage of their economies.
“In summary, we expect an immediate repricing of equity securities in line with the new base rate, while short-term price recovery will follow as fixed income and equity markets attain new equilibrium,” he said.
Vice President of Highcap Securities Limited, David Adonri, also said the hike might adversely affect demand for equities.
He added: “With interest rate hike, more financial assets will migrate to debt. It is likely to increase Nigeria’s competitiveness, given the US rate hike, by enhancing foreign investors’ demand for Nigerian debt.
“Commensurately, the hike may adversely affect demand for equities. It is also expected to suppress demand for hard currencies and reduce the naira’s volatility. When interest rate increases, it favours fixed income investments and drives assets from equity.”
