MD, FDC, Bismarck Rewane
By Obinna Chima
With exactly one week to the next monetary policy committee (MPC) meeting, Financial Derivatives Company Limited (FDC) has predicted a 25 basis points reduction in the Monetary Policy Rate (MPR) to 11.75 per cent from 12 per cent.
MPR, the benchmark interest rate is the rate at which the Central Bank of Nigeria (CBN) lends to banks.
Managing Director/Chief Executive Officer, FDC, Bismarck Rewane, made this prediction in his monthly economic views presented at the Lagos Business School breakfast meeting, a copy of which was made available to THISDAY.
He also predicted that inflation rate would reduce further to 12.4 per cent in August from 12.8 per cent it was in July.
Inflation had declined to 12.8 per cent in July, from 12.9 per cent in June due to a tight monetary policy stance adopted by the MPC in July, where it raised the Cash Reserve Ratio (CRR) to 12 per cent from eight per cent.
Similarly, the economist predicted that the committee might reduce the CRR from 12 per cent to 11.5 per cent.
But Rewane pointed out that a 25-basis-point reduction will lead to a drop in Nigerian Interbank offered Rates (NIBOR) to an average of 12 per cent per annum, a further weakening of the exchange rate to N160/$1 at the official market and external reserves depletion to $33 billion.
However, he argued that if the benchmark interest rate was left unchanged at 12 per cent, the NIBOR will remain flat at an average of 14.2 per annum, that also there will be slow depreciation in the naira to N157/$1, slow growth in external reserves to $39.5 billion, tight credit availability to the private sector and high government bond yields.
On the other hand, he said a situation whereby the MPR is increased by 25 basis points, there will be tightened liquidity in the system, exchange rate appreciation to N153/$1, external reserves accretion to $40 billion and a 10.5 per cent inflation rate will be achieved in December.
Rewane added: “The consensus is that interest rates may be shaved. There is a four in 10 probability that CBN will shave the Monetary Policy Rate by 25 basis points.”
He maintained that the proposed introduction of N5000 banknote that had continued to generate a lot of controversies does not have any relationship with inflation, saying that “no empirical evidence of correlation between higher denominations and inflation.”
“CBN decision to restructure the currency is an avoidable controversy. Higher inflation leads to higher denominations and not vice versa. The cashless initiative makes higher denomination not a compelling case. The cost of currency reconstruction can be used for other priorities.
“Currencies are constantly printed and withdrawn from circulation and higher denominations increase the velocity of circulation and portability, it improves the settlement of transactions and the economic impact is neutral on resource allocation,” he added.