How to make money from the CBN’s 15.5% interest rate hike

Nigeria’s Central Bank Governor, Godwin Emefiele announced an increase in the benchmark interest rate (MPR) to a two-decade high of 15.5%.

He made this announcement at the end of the monetary policy meeting held on the 26th and 27th of September 2022.

The rate hike represents a 150-basis points hike from 14% while the cash reserve requirement (CRR) was also increased to 32.5%.

The MPR rise is the highest rate in the last 20 years, an indication of the aggressive move by the CBN to rein in Inflation as the money supply rose to its highest ever level of record.

The Monetary Policy Committee of the CBN stated that the previous rate hikes were already slowing down the rate of money supply in the economy suggesting that the current hike was meant to compliment prior ones.

“The MPC noted that a tight policy stance would help consolidate the impact of the last two policy rate hikes, which is already reflecting in the slowing growth rate of money supply in the economy. It also felt that an aggressive rate hike would slow capital outflows and likely attract capital inflows and appreciate the naira.”

While these are the potential benefits espoused by the apex bank, the rate hike has other implications for the Nigerian economy as we explained in this article.

We also believe there are money-making opportunities that an increase in the benchmark interest rate of an economy provides for investors. Here are some of the ones we identified.

Ask more for your fixed deposits – Aggressive savers should be on the phone right now asking their fund managers to renegotiate their fixed deposit rate.

• While this is on, new investments in fixed deposits should be at a much higher rate than they currently offer you.
• Savers in mutual funds or other schemes that offer fixed returns should also anticipate higher returns on their money.

Look for high bond Yields – As interest rates rise across the country, watch out for bond prices to tank leading to higher yields.

• This is a great buying opportunity for investors with deep pockets as they get to buy bonds at much lower prices than their face value.
• While bond prices may rise shortly after, buying them when yields are high is a great buying opportunity.

Buy the dip with Stock Market – This is not a great time to invest in the Nigerian stock market because we also believe share prices will tank.

• However, being unattractive is just in the short term thus investors who have cash should look out for great Nigerian stocks they can buy at bargain prices.
• We will suggest patience until stock prices have fallen to multi-year lows. Investors will be smart to purchase stocks that offer less than 2x in price-to-earnings ratio and double-digit dividend yields.
• Investing in banks may just be a good short term opportunity as banks tend to make money from rising interest rates.

Buy Real Estate – Landlords, especially those who do not have mortgages should expect higher rental income due to higher interest rates.

• Developers who borrowed money to build new homes or commercial properties will have to increase the cost of their units forcing buyers to increase rent.
• While rent increases for leveraged developers are a way for them to meet up their financial obligations, it is basically free money for landlords who don’t have loans.
• We also see a potential upside for property developers who are either close to finishing their developments or have properties on the market for sale.
• If the properties are in great locations, they will likely get them for higher prices.

Look out for firesale of assets – We also envisage, some developers who cannot meet up with loan repayments may be forced to sell assets under duress.

• There might be a lot of cheap assets to buy as people fire sell so they can service debts and other obligations.
• This creates buying opportunities for people with deep pockets looking for a great bargain.
• Most firesale asset sellers often respond positively to cash and can offer very generous discounts if the buyer can show proof of liquidity.

Sellers of Geffen goods – These are goods that everyone needs to buy come rain, come shine.

• Sellers of these goods will make more money during high-interest rate environments especially if they have disciplined financial management.
• You should consider venturing into these sort of businesses in times like this otherwise you might find yourself quickly out of business.

Dollar earners keep winning– While the CBN’s interest rate hike is aimed at curbing Naira depreciation against the dollar, we still believe investing in dollar-based assets is the best hedge.

• The case is further reinforced by the latest decision to hike rates which buttress our narrative over the last few months.
• Opportunities available to earn in forex should be seized as those who do will have even more naira to spend and preserve their purchasing power.
• Suffice to add that the dollar is the strongest currency in the world at the moment and is eating up other currencies globally.
• Exporters and salary earners in dollars should be in the money by now.