• Wednesday, May 22, 2024
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MPC cripples banks’ front-loading of forex market

Naira slips to record-low as politics worsen FX woes

Bankers who were making money in the foreign exchange (forex) market by advancing credit to their customers to purchase the greenback (dollar) have only succeeded in making the Monetary Policy Committee (MPC) take-off the liquidity from them.

Rising from its two-day meeting yesterday, the MPC decided to increase the Monetary Policy Rate (MPR) by 100 basis points ((bps)from 12 percent to 13 percent.

The MPC also raised the private sector Cash Reserve Requirement (CRR) by 500 basis points to 20% from 15% and moved the Retail Dutch Auction System (RDAS) mid-rate to N168 from N155, and the band around it widened to +/-5%.

This decision, analysts said, translated about N400billion that will be sterilised with the CBN, considering the broad money in supply.

“The banks were sort of putting pressure on the naira. Banks advance credit to their customers to buy dollars instead of the real sector. Banks can no longer frontload the purchase of dollars. The carrying cost of a dollar will now become very expensive.

“It is quite interesting. The decision is the right one. It is like taking the bull by the horn,” one analyst said yesterday.

“The combination of a devaluation – with a rate hike and a reduction in liquidity via the CRR hike, shows the CBN is serious about defending the new currency level,” said Charles Robertson, economist at Rencap.

Razia Khan, managing director, head, Africa Macro Global Research, Standard Chartered Bank, said the CBN has shown absolute commitment to dealing with current challenges.

According to her, they have not shied away from the tightening needed to sustain current foreign exchange reserves. The official devaluation of the naira allows the RDAS to move within the range that straddles the inter-bank foreign exchange rate.

“While the market reaction to the RDAS move in the near-term will be important, we think that these measures deal as comprehensively as possible with the challenges facing Nigeria. While Nigeria cannot do much to influence the oil price, the combination of measures today sends a powerful signal to all stakeholders on the CBN’s
production intent to do what it can to preserve macroeconomic stability”, she said.

Bismarck Rewane, managing director of Financial Derivatives Company Limited, said, “We are going to see a sort of de-segmentation in the forex market.” He expressed concern about the quantum of CRR move and the quantum of exchange rate depreciation, saying that the CBN has taken the bull by the horn in addressing these issues.

Dapo Olagunju, head of Group Treasury at Access Bank plc, and Sola Adegbesan, head of Global Markets, Stanbic IBTC Bank plc see the action of the CBN as the right policy, and as being in the right direction, especially as regards oil price and exchange rate.

READ ALSO: Need for other lenders to emulate Access Bank’s N50bn interest-free loan

The stock market reacted positively to the decisions of MPC yesterday, recording its first gain since last week. Increase buy decisions pushed the NSE ASI high to 34,115.84 points from the preceding trading day’s 33, 875.26 while market capitalisation rose from N11.183trillion to N11.263trillion, an addition of N80billion in the value of stocks.

The CBN yesterday auctioned dollars at N162.50 at its official forex window, outside its preferred band of 150-160 and ahead of a key interest rate decision on Tuesday.
This is the second time in a row it has auctioned the currency outside a band it burst out of in May. It auctioned the greenback at 158.41 to the dollar at its previous session. The naira, has been down nine percent this year, and hit a record low at the interbank window on Monday, according to Reuters.

The local currency traded down 1.58 percent on Tuesday from its previous close. The unit fell to 176.35 naira against the dollar, compared with 173.55 naira its previous close on Monday.

IHEANYI NWACHUKWU & HOPE MOSES-ASHIKE