In a move described by analysts as bold and audacious, the Central Bank of Nigeria (CBN) has moved to curb negative speculation on the naira by announcing a combination of rate hikes, tighter money policy and a devaluation of the currency.
The Monetary Policy Committee (MPC) of the CBN met on November 24 and 25, against the backdrop of moderate but uneven growth in the global economy and a build up of vulnerabilities in the domestic economy from falling oil prices.
Among the outcomes of the MPC meeting, was an increase in the Monetary Policy Rate (MPR) by 100 basis points, to a record high 13 percent, governor Godwin Emefiele announced to reporters yesterday in Abuja.
The Central Bank also increased the cash reserve requirement on private sector deposits by 500 basis points, to 20 percent, and moved the midpoint of the official window of the foreign exchange market from N155/US$ to N168/US$.
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The trading band for the currency was also widened around the midpoint by 200 basis points, from +/-3 per cent to +/-5 per cent.
“The committee was of the opinion that the economy stood to gain by further tightening of the monetary policy stance, to anchor inflation expectations and allowing some flexibility in the exchange rate to stem speculative activities and depletion of reserves,”Emefiele told reporters in Abuja.
“The current downturn in oil prices is not transitory but appears to be permanent, being a product of technological advances,” Emefiele said.
The government’s suggested budget benchmark oil price of $73 per barrel for 2015, down from $77.5 this year, may be “overly optimistic,” he added.
Oil revenues account for up to 75 percent of the Federal Governments budget. Nigeria’s gross external reserves which are managed by the Central Bank (CBN) have dropped 17 percent this year, to $37.2 billion as at November 20 from $43.5 billion, recorded on January 02.
The naira has lost about 11 percent this year, and was trading at N177.35 per dollar on Tuesday at 4.45 pm local time, according to FMDQ data.
Brent for January settlement gained 51 cents, or 0.6 percent, to $80.19 a barrel at 9:25 a.m. New York time on the London-based ICE Futures Europe exchange, as traders speculated OPEC will cut production when it meets tomorrow.
“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, chief global economist at Renaissance Capital.
The rate-setting Monetary Policy Committee last adjusted the benchmark rate in October 2011, when then-Governor Lamido Sanusi increased it by 275 basis points.
PATRICK ATUANYA
