Naira Appreciates As Cbn Raises Interest Rates

BEVERLY HILLS, March 22, (THEWILL) – The naira, on Tuesday, appreciated against the dollar after the announcement that Monetary Policy Committee (MPC) has raised the interest rates from 11 percent to 12 percent.

The CBN at the MPC meeting also agreed to raise the Cash Reserve Requirement (CRR) by 250bps to 22.5 percent, and agreed to change the asymmetric corridor around the MPR which will raise the rate on the standing deposit facility by 300bps to MPR – 500bps from MPR – 700bps.

It was observed that the naira gained N1 or 0.31 percent each at the autonomous and parallel market after trading to close at N320/$ compared with N321/$ on Monday at the autonomous market and closed at N322/$ as against N323/$ on Monday at the parallel market.

Data from FMDQ revealed that the naira closed stable at N198.82/$ and N197/$ at the interbank foreign exchange (FX) market and the CBN clearing rate respectively.

According to Razia Khan, Managing Director/Chief Economist, Africa Global Research, Standard Chartered Bank, London, much more interest is what the tightening suggests about the authorities' policy stance as she noted that “there were no moves on FX policy, although the impression this would give was that the tightening was aimed at preventing even more FX pressure on the parallel market.”

Could the measures be a means of preparing the market for an imminent FX liberalisation?

“We do not think so, as we have had few official indications of any intent to devalue the Nigerian naira (NGN). At least some acceptance of a weaker NGN would be necessary to accompany any re-opening of the FX market,” she said.

“If the authorities were hoping to attract greater foreign portfolio inflows through a market liberalisation, any tightening might have to be even more aggressive than that announced today.

“In our view, the policy measures follow from the recently stepped-up pace of liquidity sterilisation through open market operations. The CBN may be hoping to rein in pressure on the parallel FX market by tightening monetary conditions, especially if NGN depreciation on the parallel market is seen to be responsible for the recent spike in inflation.

“Because of the illiquid nature of the parallel market, however, its sensitivity to official tightening is not clear. If more FX trading is taking place outside the banking system, the transmission mechanism of monetary policy, which relies on banks for implementation, is likely to be blunted. It would take even more aggressive measures to effect any meaningful tightening of conditions.”

Story by David Oputah