Analysts say a 25 basis-point interest rate cut by the United States Federal Reserve could have significant implications for Nigeria, particularly in the areas of capital flows, exchange rate stability and monetary policy alignment.
The Federal Reserve cut its key interest rate by a quarter-point Wednesday, as widely expected, putting it in a range of 3.50% to 3.75% – its lowest level in three years. The Fed’s policy committee was unusually divided, with three members voting against the decision.
Speaking on Naijaonpoint’ Drinks & Mics podcast, analysts noted that changes in US interest rates often influence investor appetite for emerging markets, including Nigeria, by affecting the strength of the dollar and the direction of global capital.
Rolake Akinkugbe-Filani, Global Energy Finance leader and CEO of EnergyInc Advisors, said the most immediate channel through which Nigeria would feel the impact of a US rate cut is the foreign exchange market, especially the naira.
“The real issue here is the link between the rates and the dollar,” she said.
“One of the things that we’ve seen is that a stronger dollar has obviously impacted most emerging market currencies. So the first thing that we’ll probably have to look at is what that means for exchange rates, the naira specifically.”
Rolake said a Fed rate cut could offer some relief for countries like Nigeria by easing pressure on external borrowing costs.
“For emerging markets and sovereign issuers, maybe less pressure in terms of borrowing costs and external corporate borrowings as well in markets like Nigeria. That could be one area of relief,” she said.
She added that Nigeria would also need to watch how US policy moves align with those of other emerging markets, as this would influence capital inflows and investor confidence.
Chief Investment Officer at Cordros Asset Management, Arnold Dublin-Green, said a Fed rate cut was widely expected, though he warned that the central bank’s communication may remain cautious.
“I think I’ll be surprised if they don’t (cut). I don’t think there is anything that would require them not to,” Arnold said.
“What I’m not sure is something I learned this morning, hawkish cuts. So the idea that Powell cuts, but then his rhetoric or his narrative is (more cautious).”
He noted that while markets are pricing in two to four cuts next year, the Fed may prefer to assess inflation and labour market data before committing to a clear easing path.
Founder of Jadara Capital Partners, Ahmad Zuaiter, cautioned that any short-term relief from lower US rates may be temporary, warning that inflation could resurface in the US within the next year.
“I think they’ll probably cut (next year),” he said.
“I’m actually quite bearish on rates, looking at one or two years… I actually think inflation will be a big problem a year out in the US.”
“I’m actually quite bearish on rates, looking at one or two years… I actually think inflation will be a big problem a year out in the US.”
He attributed potential inflation pressures to weak regulation, tariffs and a weakening dollar, projecting that US rates could rise by 100 to 200 basis points over the next two years.
Responding to questions on Nigeria’s exchange rate stability, Ahmed said recent gains were driven more by domestic reforms than by dollar weakness.
“It’s primarily reform-driven,” he said. “Investors… are choosing to buy the naira. You are now comfortably a positive real rate profile.”
He said the naira remains undervalued, giving policymakers room to sustain reforms.
“When the naira touched N1,750 to N1,800, you really overshot,” he said, adding that the currency is still “anywhere from 30 to 40 per cent cheap.”
Ahmed also defended the Central Bank of Nigeria’s cautious stance on interest rates.
“They want to be conservative and make sure that inflation structurally is starting to come down,” he said.
He added that interest rate adjustments alone may not significantly change liquidity conditions.
“What really changes is that the currency is undervalued… in the perception of Nigerians and foreigners,” he said.
Analysts said Nigeria’s monetary authorities would need to closely monitor US developments to manage exchange rate pressures and attract stable capital inflows.
They noted that while a Fed rate cut could ease pressure on the naira and improve foreign portfolio investment flows, lingering global inflation risks and US political uncertainty could limit the extent of the benefits for Nigeria.
Federal Reserve Chair Jerome Powell only has three policy meetings left before his term ends in May.
Powell’s impending replacement makes it more challenging to predict future interest rates, as new leadership may alter the Fed’s strategy.
Financial markets are pricing in lower future interest rates than Fed officials have forecast, likely because President Donald Trump’s nominee would push for lower rates.