In the face of escalating inflation in Nigeria, the financial market’s reaction indicates that individuals with lower incomes are facing challenges, while high net worth individuals (HNIs) and large corporate entities are benefiting from increased investment income. The recent figures from the National Bureau of Statistics reveal a 27.33 percent Year on Year (YoY) inflation rate for October 2023, marking the 10th consecutive monthly rise and the highest rate in 18 years.
The Central Bank of Nigeria (CBN) has responded to this trend by implementing its inflation targeting monetary policy strategy, including raising the Monetary Policy Rate (MPR). Consequently, interest rates have been steadily increasing in the money market, with liquidity remaining high.
Despite the challenges faced by low-income earners due to rising inflation, HNIs and major corporations are taking advantage of the situation, investing significant resources in financial assets, particularly in the fixed-income market and equities, resulting in substantial returns.
Fixed deposit rates have reached record highs, averaging around 15 percent in the third quarter, while many fixed-income securities are trending at 17 percent. These developments align with the Central Bank of Nigeria (CBN’s) high MPR rate, reaching 18.75 percent in the third quarter.
Returns on equity investments have also seen record highs, reaching 35 percent as of the third quarter, showcasing one of the best performances globally. This phenomenon is unusual, as a typical rise in fixed income returns tends to correlate with a decline in equity returns.
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Conversely, low-income earners have been hindered by increasing inflation, impacting their purchasing power and limiting their ability to save or invest. Notably, they face challenges such as low-interest rates on savings and limited access to loans, with higher lending rates compared to those offered to HNIs and major businesses.
Economists caution about the potential risks of increasing poverty in the wake of substantial financial gains in the economy, creating a situation where wealth concentration grows, and the less privileged encounter entrenched challenges, a concern not exclusive to Nigeria.
Various analysts provide insights into this disparity, highlighting factors such as the safety of the financial system with high net worth customers, the negotiating power of big customers, and the need for banks to manage liquidity more profitably.
As inflation rises and the Central Bank of Nigeria (CBN) maintains a tightening stance, experts anticipate sustained yield uptick in the fixed-income market. The Equities market might experience a bearish trend due to higher opportunity costs in the fixed income market, leading investors to reallocate funds to capture higher yields.