The decision by the Monetary Policy Committee (MPC) to retain the monetary policy rate (MPR) at 12 percent, and cash reserve ratio on public sector funds at 75 percent, while raising the CRR on private sector deposits to 15 percent, from 12 percent, has taken the market by surprise, Business Day investigations show.
Some analysts said last night that the ‘compromise solution’ to the lingering pressure on the nation’s currency and depleting foreign reserves fell short of expectation, with the likelihood of an emergency meeting of the MPC before the next meeting in May, going by the alarming rate of depreciation of the naira.
Besides, they faulted the argument of Sarah Alade, the CBN governor, who while addressing the press post-MPC meeting, said it would not affect lending rates, and that unless the regulator had other information not available to the public, the lending rate was bound to rise.
They said that they had expected a raising of the benchmark interest rate, MPR to calm foreign capital reversals occasioned by the US Quantitative Easing or tapering.
They added that they foresaw unabated pressure of the naira, with the consequent widening gap between the interbank and parallel markets.
Alade had said on Tuesday that the raising of CRR on private sector deposits 300 basis points to 15 percent, was a tightening position to douse undue pressure on the Naira and stem creeping core inflation.
“Recent resurgence of core inflation in spite of the downward trend in headline inflation reinforces this position. Thus a prudent monetary stance would also facilitate better reserve and exchange rate management in an environment where Fed tapering increases pressure on emerging economies financial markets,” Alade told a post MPC press conference yesterday in Abuja.
She explained that the Committee saw a raise in the private sector CRR as the best option to achieve the monetary tightening needed presently, without necessarily forcing an increase in lending rates through an MPR hike.
Razia Khan, analysts with Standard Chartered Bank, London, who regarded the action as “postponing the inevitable”, said “While this will provide some near-term stabilisation to markets – it is a tightening of policy, and signals the withdrawal of additional liquidity after all. It falls short of dealing with the much bigger issues currently facing Nigeria.
“Given current conditions – QE tapering, concerns about bigger policy changes ahead, a shortfall in oil earnings, a secular narrowing of the current account surplus and the election cycle – each successive round of tightening is likely to be even less effective in attracting new inflows into Nigeria.”
Khan further said, “The spread between the interbank and RDAS FX rates is likely to remain in place. In all likelihood, pressure on FX reserves – now less than USD 38bn – will persist. This is the consequence of structural factors.
“With continued depletion of FX reserves, speculation that the CBN’s official band will have to give eventually, is only likely to increase. The CBN might have dealt with this from a position of strength, at a time of relative calm in the markets. Or it might choose to make the adjustment at a time of increased stress, with the likelihood in that case that we see considerable FX overshooting.”
Analysts at Afrinvest said that although the development is in line with their expectations, “However, we expected that benchmark interest rate; (the MPR) will be raised to calm foreign capital reversals (as observed in other emerging markets) and ease the current pressure on the Naira.
“We expect lending rate to inch-up slightly (minimum 50 bps) to compensate for the potential income lost from the 3.0% private sector funds secluded from the financial system. In addition, we expect slight increased competition for private sector deposits which may lure banks to increase interest rate to preserve existing deposits and attract new deposits”.
Speaking further, the analysts said, “As a result of the persistent capital flow reversals, the up-coming 2015 elections and the non-adjustment of the MPR in Nigeria to favour FPIs, we expect the naira to remain under pressure in the near term.
“Given the significant decline in the external reserves in 2014, currently at US$38.1bn (9.5% YTD decline), the CBN might call for an emergency meeting before its May 2014 MPC meeting, if the reserve depletes below US$35.0bn before May.
“This may necessitate the CBN to adjust the exchange rate band in the interim, not minding its impact on imported inflation.”
Bismarck Rewane, chief executive Financial Derivatives Company, said he expects a continuation of the tight monetary policy, adding that this may not create the much needed impact.
Bismark, who spoke on CNBC said unless the CBN has information at its disposal which others may not have, the tight policy falls short of expectation.
Akin Daudu of Citibank, speaking on the same platform, said although the tight monetary policy was expected, what was not certain was the form it was going to take,adding that the hike on CRR in what ever form, means higher lending rate for people.
John Omachonu & Onyinye Nwachukwu
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