Why CBN May Retain Monetary Policy Rate

13 Jan 2013

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211112F2.Lamido-Sanusi.jpg - 211112F2.Lamido-Sanusi.jpg

CBN Governor, Sanusi Lamido Sanusi

  Festus Akanbi
Stakeholders in the economy had called for a cut in the monetary policy rate in view of the prevailing economic indices, which are said to be in favour of a softening of the current rate regime.

But followers of the current disagreement over oil benchmark in the 2013 budget between the Executive and the National Assembly said the Central Bank of Nigeria (CBN) may be compelled to uphold the existing higher rate.

And with just one week to the first meeting of the CBN’s Monetary Policy Committee in the New Year, there are indications that the anticipated downward trend in the nation’s monetary policy may not be sustainable in view of the emerging realities in the Nigerian economy.

The scenario, according to financial analysts, will also ensure that the status quo on (the high interest rates) is maintained in the first quarter of the year.

Complaints had also come in torrents from the camp of the nation’s manufacturers over what they described as an unfriendly interest rate regime and the attendant strains on manufacturing because borrowing from bank was becoming uneconomical in the face of a prohibitive interest rate.

Financial analysts said as Nigerian economy rolls into the first quarter of the New Year, the rate-tightening regime appeared to have run its full course because the prevailing economic fundamentals have shown that cutting the MPR at this time will not hurt the nation’s economy.

The MPC at its meeting of Monday and Tuesday November 19 and 20, 2012, maintained the current policy stance i.e. to retain the MPR at 12 per cent with a corridor of +/- 200 basis points around the midpoint; and retain the Cash Reserve Ratio (CRR) at 12.0 per cent and the Liquidity Ratio at 30 per cent.

However, financial analysts who did a preview of next week’s meeting of the Monetary Policy Committee of the CBN said the CBN may fail to opt for the popular view, which favours a cut in the rate because of the controversies rocking the 2013 Budget over oil benchmark price.
Consequently, bankers have warned that a regime of high interest rate may prevail for most part of the year. According to them, while the presidency is being pressurised to approve the new oil benchmark approved by the National Assembly, the only way the presidency can curtail the anticipated shock is through a regime of higher monetary policy rate.

Chief Executive, Skye Bank Plc, Mr. Kehinde Durosimi-Etti, who raised the prospect of a higher interest rate in 2013, listed government appetite for borrowings and the quest to stabilise exchange rate as reasons for the high interest rate.

Speaking on the outlook for 2013, Durosimi-Etti said “Exchange rate is stable but interest rate is still high. Interest rate is high because government borrowing is high and two, the need to stabilise exchange rate. “The tightening of money supply pushed the money rate up. It is our hope that in 2013, interest rate should slide a bit. Some of the things that are still holding interest rate where it is include the need to maintain exchange rate. That’s the biggest factor. So the tightening will continue and the Central Bank will continue to maintain that stance as long as there is any sense that exchange rate may go out of control.”

The National Bureau of Statistics (NBS) is expected to release the inflation figure for the month of December 2012 this week ahead of the Monetary Policy Committee (MPC) Meeting of the CBN next week.

Meanwhile, Research of FSDH Securities Limited has forecast that Nigeria’s Composite Consumer Price Index (CCPI) in December 2012 would rise by 123 basis points to 141.7 points in December, which will produce an inflation rate of 12.5 per cent, 20 basis points higher than 12.3 per cent recorded in the month of November.

According to FSDH Research, an analysis of the foreign exchange rate shows that the value of Naira depreciated marginally against the US Dollar in the month of December, 2012 by 0.01 per cent.  Speaking on expectations for the country, the bank chief said “As a country, the expectation is that we will earn more from crude oil sale.

The expectation is that crude oil sale could reach 2.6 billion barrel of oil per day if the prices remain within the range of the budgeted rate of the $100 mark, our revenue will be more than that of last year, if that is the case, it will enable planning, and macro stability, both in terms of interest and exchange rates. It means we have the dollars to fund the economy because of the growing probability and what that means is that we will be able to maintain exchange rate stability.

“If there are shocks in the price of crude oil, that will be bad for us as a country because it will affect the revenue that will be coming in and I don’t think if we will be able to absolve that shock in a sustainable basis.

If the shock is temporary, but if it is sustained, then as a country, then we are going to have problems because our reserve will not carry us for long and we rely a lot on imports, we do not export a lot other than crude, so we will be having some real problems on our hands in terms of our ability to continue into future,” he said..

Tags: Business, Nigeria, Featured, Monetary Policy

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