Market awaits central bank position on monetary policy
From OKORO CHINEDU in Lagos, Nigeria
LAGOS, (CAJ News) – FOLLOWING days of deliberations, the Central Bank of Nigeria (CBN) is set to announce the outcome of its Monetary Policy Committee (MPC) sitting later this (Tuesday) afternoon.
Ahead of the announcement, analysts said Nigeria’s fragile macroeconomic landscape presented a challenge to the MPC, with annual gross domestic product (GDP) growth printed at a paltry 2,8 percent in third quarter of the year, headline inflation running at 9,3 percent year-on-year and the
foreign exchange market remaining largely dislocated from fundamentals.
This, according to Rand Merchant Bank, has resulted in a continued divergence between the official and parallel Naira rates.
“The CBN has concentrated much of its efforts on stabilising the naira this year, possibly at the expense of real GDP growth. Measures undertaken by the CBN to preserve the value of the currency have seemingly eroded market confidence and created an imbalance in foreign currency supply and
demand, stifling corporate activities,” the think-tank said ahead of the announcement by CBN.
“To our minds, the workings of the interbank foreign exchange market remain sub-optimal. Yet, the CBN is unlikely to alter its stance at this particular gathering as it focuses its attention on reviving credit growth while maintaining a firm hold on inflation.
“We believe that adjustments to the Naira are contingent on Nigeria’s fiscal stance — a lower oil price assumption would require a weaker exchange rate to ensure that the government can achieve its revenue target.”
RMB projected the CBN would look to build on the measures undertaken in September through unconventional policy mechanisms.
Having lowered the Cash Reserve Ratio from 31 percent to 25 percent to counter the impact of the Treasury Single Account on banking sector liquidity, the bank could attempt to increase lending to productive sectors of the economy by affecting the Standing Deposit Facility.
“This would imply reducing the amount that commercial banks could access from the CBN on a short-term basis to ensure that excess cash balances are redirected to the real economy,” the think-tank added.
It said amending the rate at which funds are borrowed, which is effectively lower than the prevailing monetary policy rate, would prove ineffective given the poor correlation between changes in the MPR and credit growth.
“The upshot is that private sector credit growth could remain muted, regardless of these measures, as corporates struggle to contend with higher operating costs and slowing demand, limiting their productive capabilities.”
– CAJ News
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