BusinessDay
NigeriaDecides2023

Naira under pressure as MPC decides on rate today

Nigeria’s embattled naira and the persistent rise in inflation will weigh heavily on the interest rate decision of the Monetary Policy Committee (MPC) meeting today in Abuja.

The naira touched a new low in both the official and parallel markets on Monday. While the currency crashed to N722 per dollar in the more-accessible parallel market, it slumped to N436 per dollar in the official market.

The depreciation of the naira followed rising demand for dollars for Business Travel Allowance, Personal Travel Allowance, and school fees by the end-users amid scarcity of the greenback.

“The MPC urgently needs to address the naira’s downward spiral with appropriate policy interventions to improve exports, harmonise rates and promote import substitution,” said Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria.

The naira has now weakened by 21.74 percent against the dollar in the parallel market since the beginning of the year, compared with a 3.9 percent decline in the official market.

The sharp decline in the exchange rate has hurt manufacturers and small businesses that rely on imports. Some analysts are of the view that the Central Bank of Nigeria (CBN) may hike interest rates further as a way to lure foreign inflows into the country and ease the pressure on the naira.

Accelerating inflation is also seen influencing the decision of the MPC, with analysts polled by BusinessDay expecting further tightening of the monetary policy stance.

Godwin Emefiele, governor of the CBN, had said recently that the apex bank would continue to tighten its monetary policy stance if the rising inflation persisted.

“There is a high probability that the MPC will again raise interest rate by say 50 basis points to fight inflation, more so that the latest GDP growth rate shows improvement,” Ayodele Akinwumi, an analyst at FSDH Merchant Bank, said.

Nigeria’s headline inflation accelerated to the highest level in 17 years to 20.52 percent in August 2022, from 19.64 percent in the previous month.

Oyedele noted that the MPC has raised the benchmark interest rate by a combined 250 basis points just in the past few months.

He said: “However, this has not been able to slow down inflation essentially because the current inflation is, to a large extent, not due to excess money supply.

“Most of the existing policy responses focus on the demand side and not enough focus on the supply side. This creates market distortion which further discourages forex supply.”

Jerome Powell, chair of the US Federal Reserve, on September 21, 2022, announced a third consecutive “jumbo” 0.75 percentage point rate hike to rein in inflation.

The Fed’s decision to increase interest rate is to curb the rising inflation, which is at a 40-year high.

The consumers’ actions to the rising interest rate will cause the economy to cool off and to enter into a recession, according to Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.

“There is a high probability that the MPC will again raise the interest rate this week by say 0.5 percent also to fight inflation, more so that the latest GDP growth rate shows improvement,” he said.

Patrick Njoroge, Kenya’s Central Bank, said Fed’s decision may push the global economy into recession.

Read also: Naira’s gap with official rate widens to most since 2016

The CBN had on July 19, 2022 tightened its benchmark interest rate by 100 basis points to 14 percent, the second straight raise this year to curtail rising inflation.

“The CBN has hiked rates twice in the last two MPC meetings. Yet, inflationary pressure has not abated. If anything, it has intensified. Evidently, our inflationary conditions are not credit driven,” said Muda Yusuf, CEO/founder of Centre for the Promotion of Private Enterprise.

According to him, private sector credit as a percentage of GDP is just about 12 percent, one of the lowest in the world.

He said: “This ratio is over 120 percent in South Africa, and over 200 percent in the USA. It shows the degree to which the banking sector is disconnected from the economy. We cannot have a tightening policy in an economy grappling with fragile growth and high unemployment.

“The credit conditions are already very tight. Cash Reserve Requirement (CRR) is at 27.5 percent, one of the highest globally. Effective CRR for some banks is about 50 percent or even more. Liquidity ratio is 30 percent. MPR is 14 percent. These restraining thresholds are already on the high side. Financial intermediation is already being considerably impeded.”

Yusuf was concerned that investors with credit exposure to the banks were already groaning over hike in interest rates on the back of the increases in MPR over the last two MPC meetings.

“This is of course in addition to the cost pressures driven by the forex crisis and the soaring energy cost. It will not be in the interest of the economy for the CBN to hike rates at its next MPC meeting,” he said.

Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited, said the CBN is likely to allow an adjustment at the I&E window towards N440/$, adding that it would increase forex supply at the window.

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