Raising high hope on interest rate reduction ahead of MPC

A head of the Monetary Policy Committee meeting (MPC) this month, some analysts are raising optimism over interest rates cut following the recorded improvement in the country’s Gross Domestic Productivity (GDP).

The Monetary policy rate (MPR) which is adjusted periodically by the MPC based on observed behaviour of economic fundamentals such as inflation, exchange rates and output is currently at 14 percent.

Last week, the National Bureau of Statistics (NBS) released the fourth quarter result which showed that GDP contracted by -1.30 per cent in the final quarter of 2016, signifying a gradual narrowing of the nation’s recession.

The report revealed that the economy recovered by -1.66 per cent from three previous quarter contractions in 2016, from -0.36 per cent recorded in the first quarter to -1.30 per cent in the late quarter.

“I see interest rates coming down in 2017. Given that GDP is improving, there will be further improvement in GDP in first quarter of 2017. Inflation will also come down marginally in February”, Uche Uwaleke, head of department, banking and finance, Nasarawa State University said in Sokoto at the seminar for financial correspondence and business editors organised by the Central Bank of Nigeria (CBN).

Interest rates, foreign exchange and inflation were part of the discussions at the seminar. Interest rates have generally reflected the policy regimes and shocks from the domestic and external macroeconomic environment.

Interest rates comprise banks’ deposit and lending rates, money market rates such as interbank (call, OBB) rates, repo rates, NIBOR, NTBR Open Market Operations (OMO) bill Rates, Discount rate, Yields on Federal Government Bonds and corporate bonds.

Making a presentation on “Interest Rates Behaviour in a Period of Economic Uncertainty”, Uwatt B. Uwatt, director, research department, CBN, outlined two regimes of interest rates including controlled regime, operated before 1986 and Structural Adjustment Programme (SAP) in 1986 which has remained in force till date.

Represented by Owalo Fagi of CBN, he said adoption of “guided deregulation” from 1994 to 1998 caused moderation in rates, although lending rates remained high due to oligopolistic structure of the banking industry.

Uwatt noted that interest rates moderated prior to SAP, became volatile thereafter, adding that universal banking led to increase in rates.

Emmanuel Ukeje, special advisor,  financial markets, Governor CBN, said who spoke on exchange rate management in a period of economic uncertainty, noted that Nigeria, like some other jurisdictions has transited from one regime of foreign exchange management to another; ranging from fixed to flexible exchange rate, accompanied by different institutional and legal frameworks.

He added that the choice for or against of any regime at any point in the economy’s history is influenced by the desire of the monetary authority to maintain the external reserves that safeguard the international value of the legal  tender currency.

“Exchange rate is a significant predictor of inflation rate and output. In a volatile exchange rate environment, market expectations are often very high and driven by expectations of future rise in prices of goods and services that fuels inflationary pressure and worsens the exchange rate situation”, he said.

HOPE MOSES-ASHIKE