CBN Meeting In Focus, Spotlight Shines On Fed By Lukman Otunuga

It is not only the Federal Reserve that will be under the spotlight this week.

For those with an interest in Africa’s largest economy, all eyes will be on the Central Bank of Nigeria which is widely expected to conclude with interest rates left unchanged. Back in November, the central bank decided to leave interest rates unchanged at 11.5%. Since then, nothing much has changed economically with the same key themes still in play.

While other countries across the globe are experiencing untamed inflation, Nigeria’s inflation continues to slow. Although the annual inflation rate rose to 15.63% in December, after eight straight months of declines – the trend still points south. This continues to provide the CBN enough breathing room to leave interest rates unchanged in an effort to promote economic growth.

But the key question remains for how long? As the Fed and other major banks tighten monetary policy, the CBN may be forced to act – especially if interest differentials widen between the Naira and other currencies. Domestically, pre-election spending ahead of the general elections in 2023 could rekindle inflationary pressures – possibly forcing the CBN to take action. While the first MPC meeting of the CBN may be a non-event as the central bank sticks to the script, 2022 promises to be eventful for the bank and the Nigerian economy.

Markets Cautious Ahead Of Russia-Ukraine tensions and Fed Meeting

Asian stocks flashed red on Tuesday morning, alongside U.S futures after an explosively volatile session on Wall Street.

Global equity markets were flung on a chaotic rollercoaster ride as investors grappled with Fed hike fears and mounting geopolitical tensions over Ukraine. In the currency space, king dollar edged higher despite the slight retreat in Treasury yields while gold glittered amid the risk aversion.

European markets are catching up on the strong US close this morning, but the caution in Asia has cast a cloud over sentiment as investors would prefer to shrug off the intense volatility that rattled global markets on Monday.

Although Wall Street swung back toward positive territory yesterday as investors exploited the selloff to snatch discounted shares, US equity bulls are certainly not out of the woods. Should inflation concerns, Fed hike fears, and geopolitical tensions fuel risk aversion in the days ahead, this could spell trouble for risk assets across the globe.

Overnight, Australia’s inflation jumped to 3.5% in the fourth quarter of 2021 amid rising petrol and housing costs.  The Australian dollar pushed higher during early trading as expectations rose over the RBA adopting a more hawkish tone at its next monetary policy meeting on February 1. Traders are currently pricing in a 58% chance of a rate hike by May 2022, with June fully discounted.

Spotlight swings on Fed meeting

Although monetary policy is widely expected to remain unchanged, the FOMC meeting could provide some key insight into how aggressive the Fed intends to tighten policy throughout 2022. Markets expect the central bank to signal on Wednesday that it plans to hike interest rates in March, with a total of four 25 basis point interest rates increases expected by the end of this year. While the Fed may stick to the script, any hesitancy on future rate increases or a more dovish tone could breathe life back into riskier assets. Alternatively, a hawkish Fed may deal another blow to stock markets, injecting equities bears with fresh confidence.

Commodity spotlight – Gold

Gold kicked off the week on a firm note as geopolitical tensions accelerated the flight to safety.

The slight retreat in Treasury yields also helped zero-yielding gold, as prices ventured towards the $1845 resistance level. There is no doubt that this will be a big week for gold with its near-term outlook likely to be influenced by the Fed meeting.

A hawkish Fed that signals multiple rate hikes could dampen the appetite for gold, resulting in prices sinking back towards $1831 and $1810. If the Fed surprises markets by deviating from the script and shows hesitancy in future rate hikes, this may push the precious metal higher towards $1870.

Lukman Otunuga is Senior Research Analyst at FXTM

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