D-day for Nigeria central bank
from OKORO CHINEDU in Lagos, Nigeria
LAGOS – HAVING exhausted its method of direct intervention, the Central Bank of Nigeria (CBN) looks likely to enact measures to counter currency weakness at its November Monetary Policy meeting on Tuesday (today), analysts said.
“Interest rate hikes, of 150bp to 200bp, might be in the offing to emphasise the CBN’s objectives of price and exchange rate stability, but the relative ineffectiveness of the interest rate channel means that the CBN will be compelled to use the credit channel to communicate its policy intentions,” said an analyst on Tuesday.
This method is considered an enhancement mechanism rather than a main conduit for monetary policy as it strengthens the traditional interest rate impulse through bank lending and reserves, Rand Merchant Bank, which closely analyses the local markets said.
“The CBN has used this particular path with great success in the last year, effectively tightening monetary conditions by raising the reserve requirement (RR) on public sector deposits from 12 percent to 75 percent,” the think-tank stated.
This has reduced commercial banks’ liquid assets (by roughly NGN1 trillion) and dissuaded banks from extending credit to the public sector, which is dominated by the three tiers of government
“In the absence of adjustments to the deposit and lending spreads around the MPR, we envisage a possible reduction in the CBN’s open forward FX position and further increases in the cash reserve requirements on public sector deposits from 75 percent to 100 percent and private sector deposits from 15 percent to 20 percent to drain excess naira from the system.”
According to market watchers, these actions could potentially mitigate naira losses, but the growing divergence between the WDAS and BDC rates would hasten an official devaluation of the exchange rate.
The current reference rate of USD/N155 is seen as immaterial to an interbank market that has consistently priced above the 3 percent spread to the official peg since January 2014.
RMB forecast authorities might err on the side of caution and defer currency adjustments pending the outcome of OPEC’s annual meeting on Thursday.
RMB said a credible agreement would buy the CBN time, if it spurred a recovery in the international oil price.
“However, the global market will remain materially oversupplied if OPEC opts against production cuts, leaving the CBN in an even more precarious position. An interesting day ahead.”
– CAJ News
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