The Federal Open Market Committee's unanimous decision to raise the benchmark federal funds rate by 25 basis points to a range of 3.75% to 4%—the first increase since July 2023—has renewed concerns about capital flows into emerging markets, including Nigeria. The committee also indicated that another hike could follow later in the year, reinforcing the appeal of dollar-denominated assets.
For Nigeria, the immediate exposure lies in foreign portfolio flows and exchange-rate pressure. Analysts who spoke to Nairametrics said elevated domestic yields could help retain foreign portfolio investors, although imported inflation and naira volatility remain risks.
Dr. Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise, said the US move could trigger some movement of portfolio investments from emerging economies to the United States. He argued, however, that Nigeria's exceptionally high domestic rates should limit the scale of potential outflows, citing returns on Open Market Operations bills, treasury bills and bonds.
'I'm not saying that it won't affect us, but the risks are lower because our interest rates are very high,' Yusuf said.
Dr. Yusha'u Aliyu, an Abuja-based economist and policy analyst with the Institute of Professional Economists and Policy Management, said the US rate increase could affect Nigeria through financial markets and the cost of imported goods and services. He noted that some Nigerian payment firms are working towards listing on US stock markets, which could expose financial services pricing to developments in the United States. Aliyu cautioned that the Fed's decision should not automatically push the Central Bank of Nigeria to follow, given declining manufacturing output linked to high borrowing costs.
'We cannot see similar hike in Nigeria's policy rates because the report from the CBN where manufacturing sector is recording a decline as a result of high interest rates leading to high cost of production,' he said. Aliyu expects the Monetary Policy Rate to continue moderating if inflation eases.
Dr. Abimbola Oyadele, an analyst at Kwik Securities Ltd, said higher US interest rates would strengthen the incentive to hold dollar-denominated assets, potentially affecting portfolio flows and increasing foreign-exchange market volatility. He pointed to Nigeria's improved external position, with foreign reserves at about $54 billion, as a moderating factor if crude oil exports, remittances and other inflows continue. Oyadele added that the CBN may need to maintain a relatively tight monetary stance for longer if external monetary tightening pressures the exchange rate and inflation.
