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EU, US are Buying Bonds But Nigeria is Selling. Why?

2 months ago
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EU, US are Buying Bonds But Nigeria is Selling. Why?
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Economic blocs and national economies are employing a mix of strategies to cushion the deleterious effects of the Twain of coronavirus pandemic and slump in oil price. The European Central Bank and the U.S Fed left rates unchanged while resorting to pumping money into their economies via quantitative easing or a bond buying programme. Nigeria on the other hand is mopping up liquidity and buying bonds. The reasons for the different approaches is a difference in circumstances.

 

The EU launched a new Pandemic Emergency Purchase Programme (PEPP) worth of €750 billion. Purchases were conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP). Economists see the ECB boosting emergency bond buying later this year.

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The New York Times at the time described the EU move as an enormous new wave of bond purchases meant to counteract the “serious risks” to the eurozone caused by the coronavirus pandemic. It involves pumping cash into financial markets deeply rattled by the pandemic.

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Extraordinary times require extraordinary action,” Christine Lagarde, the president of the European Central Bank, said on Twitter about the programme. “There are no limits to our commitment to the euro.”

 

This is as the United States announced $2 trillion package to stimulate the economy with source of the money coming from bond purchase. Reporting the stimulus, Politico said, “The Federal Reserve announced it is slashing interest rates to zero and buying hundreds of billions of dollars in bonds, as part of a sweeping emergency effort to breathe life into an economy bracing for the fallout from the coronavirus.

 

“The stunning move by the Fed comes as financial markets have whipsawed wildly over the past few weeks, with panicky investors looking to the federal government for a robust response to the growing global pandemic”.

 

While the EU and US pumped money into the bond market, Nigeria sourced over N850 billion from the bond market. This was as the Central Bank mopped up over N1.4trillion from banks at the time.

In effect, while these economies are pumping money into their economies, Nigeria is sucking money from its economy.

 

The main reason these economies and Nigeria appear to be attacking the same problem with opposite tools lies in inflation. While these economies have very low inflation, Nigeria has high inflation to deal with. EU inflation was 0.9 percent in January while US inflation was 1.4 percent in the same period. By contrast Nigeria’s inflation was 16.47 percent in January.

 

To check the situation, both the European Central Bank and the Federal Reserve Bank have left rates unchanged in their respective meetings this week. Their rates are in the neighborhood of zero; 0.25 fir the US. But Nigeria still has till June to make any adjustments to the benchmark rate and something has to be done before that time to check the economy from runaway inflation. The Central Bank mop up and the FG bond purchase would serve these purpose; to scale down liquidity in the system.

 

The effect of a central bank mop up affects bank’s ability to create money, effectively putting the money multiplier in reverse and withholding much needed capital by private companies. The reason is to check runaway inflation. The untoward effect if this happens is that growth will suffer.

 

Economic sources say a “rise in inflation is likely to mean a rise in the cost of raw materials. Also, workers are likely to demand higher wages to cope with the higher cost of living. This rise in prices can also cause greater volatility and uncertainty. With firms uncertain about future costs, they may hold back from making investment decisions. Firms generally prefer a low and stable inflation rate.

 

“Also, with a inflation rate, firms may expect rising interest rates, which will increase cost of borrowing – another reason to hold back on investment.”

The early move by Nigeria’s central bank are telltale signs of what is likely to happen when they eventually sit to set the benchmark rate of Monetary Policy Rate (MPC). They may likely hold rates steady as they are won’t to do given their Dovish disposition or raise them by a a quarter of a percentage point.

The move would be to put inflation in check despite the tight conditions under which businesses would be operating under the heavy hammer of COVID-19. The retort for not cutting rates to make capital more available could be in the fact the several interventions have been made to save them in the early stages of the lockdown. It is hoped that the economy will not experience more shocks as to make the moves ineffective.

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