Nigeria’s naira to lose value next week over CBN rate cut ~Analysts
Nigeria’s naira is expected to depreciate further next week on the parallel market as traders and endusers factor in the effect of the recent Central Bank of Nigeria (CBN) sudden cut in its benchmark interest rate.
The CBN slashed its Monetary Policy Rate (MPR) by 100 basis points to 11.5 percent on Tuesday, citing the need to boost credit to the production sector of the economy as part of its reasons.
Traders said the cut in interest rate could trigger increase demand for foreign currencies as investors seek value for their funds and try to hedge against possible depreciation of the local currency.
An economist at Standard Chartered Bank, Razia Khan said decision to slash interest rate has sent a mixed message over the CBN willingness to re-open the foreign exchange market.
“The CBN appears to have stepped back from action that might have had a more immediate impact on inflation expectations.
“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,” Khan who is Managing Director, Chief Economist, Africa and Middle East Global Research said in an email to Global Financial Digest.
On the Investors and Exporters (I&E) foreign exchange window, the naira closed flat at ₦386.00 to the dollar with most participants maintained bids between ₦383.00 and ₦390.84 per dollar.
Total forex market turnover in August 2020 decreased by 9.80 percent to $9.76 billion from $10.82 billion recorded in July 2020 as the liquidity challenges in the foreign exchange market persist, analysts at FSDH said.
On the parallel market, the local currency traded around N467 to the dollar, indicating around 0.4 percent depreciation against the the market closing rate last week.
At the CBN window, the naira traded around N381 to the dollar, the level the local currency has traded since the regulatory bank devaluation in July.
Analysts at the Financial Derivatives Company (FDC) said lower interest rate amid rising inflation increases the interest rate-inflation differential in favour of the US.
“This heightens the risk of capital flight, which will further increase the pace of external reserves depletion. Also, Nigeria being an import dependent economy stands the risk of higher import prices due to a stronger dollar.
“This will negatively impact the country’s balance of trade and terms of trade levels. The CBN’s ability to support the naira is undermined and hence we could experience some exchange rate volatility,” the FDC analysts said in the company’s latest economic bulleting.