Rising US Interest Rates Will Increase Cost of Capital and Debt Burden — Report

Looking ahead, analysts at investment bank and research firm United Capital Research said the implications of rising interest rates in the United States (United States) and other markets developed are that there will invariably be an increase in the cost of capital for emerging / frontier markets like Nigeria, as well as an increase in the debt burden and capital outflows.

In its research report last week, the company also observed that tighter financial conditions could lead to a significant slowdown in foreign investment.

“We expect the US Fed’s decision, along with global inflationary pressures, to influence the stance of monetary policy at the national level, as the Monetary Policy Committee (MPC) may need to raise rates to make attractive naira assets.

“That said, we expect higher returns on fixed income assets in 2022 and pressure on equities as a higher risk-free rate increases the cost of equities,” United Capital analysts said.

At the December 2021 Federal Open Market Committee (FOMC) meeting held last week, the committee voted to speed up the rate at which it is reducing its bond purchases, putting the Fed on the back burner. on track to end the emergency quantitative easing (QE) program three months earlier. provided that.

The move will see the Fed cut its asset purchases by $ 30.0 billion, starting in January 2022.

The Fed’s latest move, experts say, paves the way for a federal funds rate takeoff, pointing to a higher interest rate environment in 2022.

England notably became the first G7 economy to hike rates two weeks ago, raising its key rate by 15 basis points (bps).

According to United Capital Research, the Fed’s hawkish turn is explained by the high inflation rate of nearly four decades and the drastic drop in the unemployment rate to almost pre-pandemic levels, with companies fervently seeking workers .

To give perspective, the unemployment rate in the United States fell to a low of 4.2% during a pandemic in November 2021.

On the other hand, annual inflation jumped to 6.8% in November 2021, the highest level since 1982.

“In our opinion, the Fed’s decision reflects confidence that the economic recovery after the pandemic is sustainable and will continue until 2022, therefore favorable to a withdrawal of emergency aid,” analysts noted.

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