What do rising interest rates in the US mean for Nigerians?
Fed rate hike, Stears

The world is becoming smaller and smaller and hyper-globalisation (the dramatic increase in countries’ dependence on each other) has been a hot topic for many global leaders. This explains why restaurant owners in Lagos are now paying over ₦600 for diesel (from about ₦290 in January) following supply constraints as a result of the Russia-Ukraine war.

 

Key takeaways:

  • The US Fed has increased its benchmark interest rate to tame record high inflation caused by the government’s response to Covid-19. 

  • This has increased the cost of borrowing. In response to this, investors have started migrating from equities and stocks to more stable assets. There have also been mass layoffs and funding pauses. 

  • In emerging countries like Nigeria, investment outflows that began in 2020 will continue, and the cost of borrowing to fund its budget will keep increasing. 
     

 

 

The adverse effects of hyper-globalisation have been so evident since the onset of the Covid-19 pandemic, which is why it was one of the main topics for discussion at the World Economic Forum (WEF) annual Davos conference this year. At the conference, global leaders largely agreed that the pandemic and current geo-political tensions offer an opportunity to reset globalisation and ensure the threats it compounds—climate change, inequality, and so on—are greatly reduced. 

The main concern is that globalisation causes countries to feel the impact of economic changes in other countries. An excellent example of where this happens often is in the financial market. For instance, back in 2008, many would remember the sharp rise in poorly structured loans, which inevitably led to a housing market bubble in the US (and burst). This caused several large investment banks to go bankrupt, which led to severe unemployment across the world as the resulting credit squeeze led to massive lay-offs (not that different from what we are seeing today). According to the United Nations (UN), about 27 million people lost their jobs between 2007 and 2009, and the majority were from advanced economies. 

So here we are again in 2022, and another significant economic event in the US is setting off a chain of events across the world. Here I’m referring to the US Fed’s latest decision to increase its benchmark rate by 50 basis points—its highest increase in more than 20 years. This is so significant because the rate dictates what other interest rates will be—mortgage rates, bank loans and more. 

Therefore, with the Fed rate higher, borrowing becomes more expensive, reducing the economy's spending. Why has the Fed increased this rate for the first time since 2002? Because of inflation. Since 2000, inflation in the US has been around 1-3%, except in 2008—the year of the global recession, when inflation was 3.8%. Since 2008, average inflation in the US was 1.5%, then in 2021, it shot up to over 4% because of massive fiscal injections to support US households during the Covid-19 pandemic. 

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Gbemisola Alonge

Gbemisola Alonge

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