The British pound sterling is exhibiting strong performance against many global currencies this year, including the naira, despite the Central Bank of Nigeria’s (CBN) hawkish stance.

Naira and British pounds
Naira and British pounds

The CBN reported that Foreign Portfolio Investors (FPIs) acquired a significant portion of a 1.053 trillion-naira auction of three-month to 12-month bills a few weeks ago, attracted by substantially higher yields. This was viewed as an indication that the CBN’s policy measures to attract dollar inflows were effective.

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Nevertheless, the naira continues to trade at N2,078 to the pound’s lower bound in the unofficial market, not far from its lowest level of N2,414 against the British pound.

The UK economy seems to be more resilient than expected, with traders anticipating the Bank of England to initiate easing in August. In contrast, the Federal Reserve and European Central Bank are expected to cut rates in June.

The Economist Intelligence Unit suggests that the CBN may resort to foreign borrowing to maintain the naira’s value and meet foreign exchange commitments.

The statement from the Economist Intelligence Unit emphasizes the need for foreign borrowing to rebuild the CBN’s buffers, clear a backlog of unfulfilled foreign exchange orders, and restore confidence, stating that this might only be feasible by the end of 2024.

While confidence in the naira remains delicate, the British economy is showing signs of recovery, with declining inflation and an improving data mix supporting the pound.

UK rates are expected to remain higher for an extended period, contributing to the pound’s recent gains, reaching a multi-month high.

Recent data, including monthly gross domestic product data, indicates expected growth in the UK economy in January after a slight contraction in December. Industrial production is projected to advance by 0.7 percent annually in January, slightly faster than in December.

Despite concerns about potential government giveaways before upcoming elections, the UK economy managed to avoid the severe recession projected for 2023. Aggressive interest rate hikes, raising the benchmark rate to 5.25 percent, played a role in this economic trajectory.

Bank of England Governor Andrew Bailey highlighted “encouraging signs” in major employment and service price indicators while remaining cautious and seeking sustained evidence of the positive trend.

However, investors express concerns about potential large giveaways by the government, particularly in light of the Conservative Party’s significant lead over the Labour Party in polls.

Caution is advised, recalling the market turmoil following the attempt to spur growth with unfunded tax cuts in 2022 by the administration of Liz Truss.