Naira strengthens after CBN raises interest rates

The naira yesterday appreciated against the dollar after the Monetary Policy Committee (MPC) raised the interest rates to 12 percent from 11 percent previously.

The CBN after the MPC meeting yesterday also raised the Cash Reserve Requirement (CRR) by 250bps to 22.5 percent, and a change in the asymmetric corridor around the MPR that will effectively raise the rate on the standing deposit facility to MPR – 500bps from MPR – 700bps  (that is 300bps higher).

Consequently, naira yesterday gained N1 or 0.31 percent each at the autonomous and parallel market. After trading on the same day, the local currency closed at N320/$ compared with N321/$ the previous day at the autonomous market. It closed at N322/$ as against N323/$ the previous day at the parallel market.

At the interbank foreign exchange (FX) market and the CBN clearing rate, the naira closed stable at N198.82/$ and N197/$, respectively, data from FMDQ revealed.

Razia Khan, managing director/chief economist, Africa Global Research, Standard Chartered Bank, London, noted that there were no moves on FX policy, although the impression this would give was that the tightening was aimed at preventing even more FX pressure on the parallel market.

According to Khan, much more interest is what the tightening suggests about the authorities’ policy stance. Could the measures be a means of preparing the market for an imminent FX liberalisation?

“We do not think so, as we have had few official indications of any intent to devalue the Nigerian naira (NGN). At least some acceptance of a weaker NGN would be necessary to accompany any re-opening of the FX market. If the authorities were hoping to attract greater foreign portfolio inflows through a market liberalisation, any tightening might have to be even more aggressive than that announced today,” Khan said in emailed response.

Commenting further she said, “In our view, the policy measures follow from the recently stepped-up pace of liquidity sterilisation through open market operations (OMOs – see Figure 1). The CBN may be hoping to rein in pressure on the parallel FX market by tightening monetary conditions, especially if NGN depreciation on the parallel market is seen to be responsible for the recent spike in inflation. “Because of the illiquid nature of the parallel market, however, its sensitivity to official tightening is not clear. If more FX trading is taking place outside the banking system, the transmission mechanism of monetary policy, which relies on banks for implementation, is likely to be blunted. It would take even more aggressive measures to effect any meaningful tightening of conditions.”