Nigeria’s interest rate cut signals mix message on forex market ~Khan
The Central Bank of Nigeria (CBN) decision to slash its benchmark interest rate has sent a mixed message over its willingness to re-open the foreign exchange market, an economist has said.
Razia Khan, Managing Director, Chief Economist, Africa and Middle East Global Research at Standard Chartered Bank said cutting interest rate in the midst of surging inflation “the CBN appears to have stepped back from action that might have had a more immediate impact on inflation expectations.”
Khan in an email response to the Global Financial Digest said the CBN action “was a deeper easing than we would have expected at this stage.
On Tuesday, the CBN slashed its benchmark interest rate to 11.5 percent from 12.5 percent against some economist projection that the regulatory bank will hold its MPR amdist accelerating inflation and efforts to conserve foreign exchange reserves.
“Reducing MPR will signal to the Deposit Money Banks to lend more to stimulate growth, increase aggregate supply, which should dampen prices in the immediate term,” Governor of the CBN Godwin Emefiele said at the end of the MPC meeting.
Emefiele said on easing the stance of policy, the MPC was of the view that this action would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment and support the recovery of output growth,” Emefiele said at the end of the MPC meeting.
But Khan said; “The action of easing policy while inflation is still accelerating sends – at best – a mixed message around Nigeria’s willingness to re-open the FX market.
“With little additional messaging around FX policy intentions, the CBN appears to have stepped back from action that might have had a more immediate impact on inflation expectations,” Khan said.
She said despite recent pressure on inflation caused by higher food prices, and the expectation of further pressure in the near-term as power sector and fuel subsidy reforms get underway, the CBN brought forward an easing that we had only expected at the November meeting.
“By cutting the policy rate 100 bps to 11.5%, and also adjusting the corridor around the monetary policy rate to +100 bps/ – 700 bps (from + 200 bps/ – 500 bps previously), this was a deeper easing than we would have expected at this stage.
“The CBN attributes price pressures largely to structural rigidities. It is eager to encourage continued bank lending – especially to critical sectors, especially at subsidised rates – in order to overcome these ‘structural issues’.
“Notwithstanding recent pressure on inflation, we have seen the announcement of a significant easing today.
“The effect of this cut will be to push the rate on the standing deposit facility (the lower corridor around the MPR) even lower, to 4.5 percent (from 7.5 percent earlier).
“This is more in line with existing market rates – correcting what previously looked like a bigger mismatch between the policy rate and market interest rates.
“However, with banks still likely facing an upper limit of N2 billion, as the amount that can be placed with the CBN, this will force banks to do something else with any additional liquidity,” Khan said.
According to her, given Nigeria’s budgetary pressures, creating an environment that is more conducive to local financing of the deficit is understandable, noting that the CBN itself has contributed N1.8 trillion to the government’s N2.3 trillion ‘economic sustainability plan.
“Given current economic weakness, however, generating the lending that might resolve price bottlenecks, might take a little longer. Any infrastructure project for example, will likely only be completed in the medium-term. There will be no immediate inflation relief, however well-intentioned the policy.
“The bigger issue surrounds the more immediate drivers of inflation – FX bottlenecks that might complicate any effective harmonisation plans.