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'MAINTAINING LOW INFLATION, INTEREST RATES, FOREX STABILITY STILL A CHALLENGE'

By NBF News
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For the remainder part of this second half of 2012, it is expected that the Central Bank of Nigeria (CBN)  would continue to adopt the 'wait and see approach' while continuing with limited interest rate hikes and increase the use of Open Market Operations (OMO) and other policy tools.

Analysts however expect that monetary policy is expected to ease in 2013 as inflation foreseeing an improved outlook.

Given the scenario, Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company (FDC) Limited believes the CBN is faced with three possible scenarios – reduce Monetary Policy Ratio (MPR), maintain neutral stance or hike rates further.

Analysing the scenarios, he estimates that a 50 basis points (bps) reduction in MPR to stimulate growth, say by 40 per cent will see the Nigerian Inter-Bank Offer Rate (NIBOR) decline to an average of 12 per cent, further weaken of the exchange rate to N165/$ at the official market, and see external reserves deplete to $32 billion, as well as see reduction in borrowing costs and growth in credit.

But if the apex bank maintains neutral stance at 12 per cent to stem inflation, the probability, Rewane puts at 50 per cent, will see the NIBOR remaining flat at an average of 14.5 percent, slow depreciation in the naira to N157/$, slow growth in external reserves to $37 billion, tighten credit availability to the private sector, increase government bond yields, and probable use of other monetary policy tools to stem inflation.

On the other hand, Rewane said increase interest rates by 25bps which is 10 per cent probable will tighten liquidity in the system, Stunt growth in credit, lead to stable exchange rate of N155/$, lead to external reserve accretion to $40 billion, and slow down in inflation to 9.7 per cent.

For now, Rewane said the outlook for exchange rate is that it is expected to continue to trade within a narrow band and restrict imported inflation.

He nonetheless said global jitters and oil price volatility will continue to put pressure on the naira, but expects a slowdown in naira depreciation as CBN interventions continue.

It is expected that the official rate could hit N160/$, inter-bank rise to N163/$, and parallel rate top N167/$ this second half.

Looking at how the security challenges in the country and the restrictive monetary policy stance of the CBN will impact the economy, FSDH Research in its outlook for the remainder part of this year said it is inclined to review the upper limit of the GDP growth forecast downward to seven percent in 2012. 'Thus our GDP growth rate forecast range is 6.5 percent - 7.0 percent', it said.

FSDH believes that the outlook for inflation will be influenced by the anticipated increase in PHCN tariff, increase in import duties in wheat and rice, the prices of food in the international market, fiscal expansion, and supply shortages in the country due to low production, amongst others.

It however expects that moderation in global commodities prices will lower the impact of imported inflation. Thus we expect inflation rate to hover around 12.5 percent – 13.20 percent to end the year.

FSDH said, after going through the communiqué released at the end of the Monetary Policy Committee (MPC) meeting, it appears that the MPC will maintain the current monetary policy stance for the remainder of the year.

It thus expects that in the money and fixed income securities market the MPC will maintain the MPR at 12 percent and the interest rate corridor around the current level within the next six months.

It also believes that the committee will maintain the current Net foreign exchange Open Position (NOP) at the current rate of one per cent until there is an appreciable increase in the external reserves, maintain the CRR and the Liquidity Rate at 12 per cent and 30 per cent respectively, will aggressively use the Open Market Operation (OMO) to mop up liquidity.

FDSH said the possible impact of these measures in the money market and on the fixed income securities will lead to tightness in the money market, increased volatility in the Inter-bank rates as the rate maintain upward trends and will drop temporarily in reaction to FAAC allocation.

It also said that based on possible impact, yields on the money market instruments will increase, yields on fixed income securities will rise, new bonds in the market will command higher coupon rate while the re-opening will command higher marginal rates, and there might be volatility in the prices of bonds in the secondary market as yields increase.