‘CBN may hike rates as election spending pressures rise’

The Central Bank of Nigeria (CBN) faces a strong likelihood of raising its benchmark interest rate in the second half of 2026, as liquidity pressures are expected to mount in the lead-up to the 2027 general elections. This projection comes from renowned capital market economist Prof. Uche Uwaleke, who spoke during a mid-year review webinar hosted by Arthur Steven Asset Management.

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The year 2026 is a penultimate election year, and the preponderance of the historical evidence is that inflation is usually slightly higher, caused by pre-election spending. If inflation is demand-driven, as a result of money supply, of course, you will expect that the central bank will hike the interest rate.

Uwaleke pointed to historical patterns where liquidity surges in the year before national elections often compel central banks to tighten monetary policy. He explained that if inflation becomes demand-driven due to increased money supply, the CBN would likely respond with a rate hike. Such a move would create a divergence in financial markets, potentially drawing capital away from equities, which have an inverse relationship with interest rates, while benefiting the fixed-income market.

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If the interest rate is further increased, the impact on the equities segment would be negative. There is an inverse relationship between the interest rate and the stock market performance. Of course, the fixed-income market will benefit once there is a hike in interest rates.

However, the economist stressed that the CBN's final decision is not predetermined and will depend significantly on the fiscal discipline of the government and the conduct of politicians. Uwaleke advised market participants to adopt a defensive stance, suggesting a rebalancing towards fixed-income assets to capitalize on potentially higher yields. Meanwhile, Dr. Emomotimi Agama, Director-General of the Securities and Exchange Commission, highlighted ongoing regulatory reforms aimed at enhancing foreign investor confidence, including addressing concerns over Nigeria's T+1 settlement to align with international trading standards.

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If politicians are disciplined regarding currency substitution, the CBN may not consider increasing its interest rate.