Nigeria set for capital inflows as Fed rate cut bolsters emerging markets

BY GODWIN ANYEBE

Nigeria and other emerging markets are poised to benefit from the recent decision by the U.S. Federal Reserve to cut interest rates by 50 basis points, marking the first reduction in four years.

This move is expected to trigger significant foreign capital inflows into Nigeria as global investors seek higher-yielding opportunities outside the U.S.
The Federal Reserve lowered its benchmark interest rate to a range of 5.00–4.75 per cent, down from 5.25–5.5 per cent, in response to easing inflation. The latest inflation reading showed a decline to 2.5 per cent, the lowest level in three years, prompting the Fed’s action.

Victor Matthews, portfolio manager and fixed income trader at Norrenberger, emphasised the impact of the rate cut on Nigeria’s financial market, noting that “our fixed income assets such as OMO bills, Sovereign Eurobonds, and Treasury bills will see higher subscriptions from foreign investors.” This shift is likely to boost Nigeria’s capital market as investors gravitate towards higher-yielding instruments.

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Across the global landscape, emerging-market currencies have experienced eight consecutive weeks of gains, buoyed by the Fed’s rate cut. However, the cut’s overall effect on global markets was mixed. While the MSCI index for emerging-market currencies remained flat for the day, it marked an eighth straight week of gains overall, supported by interest earned on the currencies. Meanwhile, the MSCI index for emerging-market stocks ended the week with a 2 per cent rise.

In Latin America, Brazil’s real and Mexico’s peso faced pressure, with concerns over fiscal policy in Brazil and expectations of further easing by Mexico’s central bank. In contrast, Asia’s currencies saw stronger performances, led by Indonesia’s rupiah and Thailand’s baht.

The baht surged 10 per cent against the dollar since the end of June, representing its biggest quarterly gain since the Asian financial crisis.
Despite the rate cut, uncertainty remains over the Fed’s next steps. Diverging views from Federal Reserve officials caused market volatility. Fed Governor Christopher Waller cited favourable inflation data as the reason for his support of the rate cut, while Michelle Bowman, the lone dissenting voice, argued that the move was premature. Traders are now awaiting key U.S. labour market data for further insights into the Fed’s future policy direction.

As global investors adjust their portfolios, emerging markets like Nigeria are set to benefit, providing a promising destination for foreign capital seeking higher returns in the wake of the Fed’s rate cut.