Interest Rate Hike Looms as MPC Meets

CBN Governor, Mr. Godwin Emefiele
  • CBN clarifies N786 billion capital injection in Polaris Bank
  •  Depositors fully protected, NDIC insists

By Obinna Chima and Nume Ekeghe

The two-day Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting, which commences today will be closely watched after the country’s emerging market peers – Turkey and Russia- recently raised interest rate.

This development is coming as the apex bank yesterday clarified its injection of N786 billion into Polaris Bank Limited, a new commercial bank that assumed the assets and liabilities of the defunct Skye Bank.

THISDAY gathered that the MPC members would be under pressure to take measures that would help the country retain exiting foreign portfolio investors (FPIs) amid turmoil in emerging markets (EMs), tame inflationary pressure and help halt external reserves depreciation.

Of more concern to the MPC members would also be that the United States Federal Open Market Committee (FOMC), which determines US interest rate and had signalled that it would likely hike interest rate this month and possibly in December. The Federal Reserve FOMC meets this Tuesday and Wednesday.

Russia’s central bank recently raised its main interest rate for the first time in almost four years, following Turkey in taking steps to defend its currency amid emerging market turmoil. The Russian central bank had raised its benchmark lending rate by 0.25 percentage points to 7.50 per cent.

But South Africa’s central bank last week left its benchmark rate at 6.5 per cent, in a tough decision by the policymakers.

Stock markets as well as currencies in EMs such as Argentina, Turkey, South Africa, Brazil, Mexico, Egypt, South Korea, Philippines and China, have plunged heavily in the past few weeks, even as the naira has remained stable. EMs across board have been under pressure since the US Federal Reserve raised interest rates in June.

In Nigeria, the external reserves have depreciated by 5.7 per cent this quarter, from $47.596 billion as of June 1, to $44.890 billion last Thursday.

The country recorded sluggish growth rate of 1.5 per cent in the second quarter of 2018.

Also, Nigeria’s Consumer Price Index, (CPI) which measures inflation increased by 0.09 per cent to 11.23 percent (year-on-year) in August, compared to the 11.14 per cent recorded the preceding month, the National Bureau of Statistics (NBS) had revealed. That was the first year-on-year rise in headline inflation after 18 consecutive disinflation in the index.

At its last meeting in July 2018, the MPC maintained the benchmark monetary policy rate (MPR) at 14 per cent, retained the cash reserve requirement (CRR) and liquidity ratio at 22.50 per cent and 30 per cent respectively. It had also announced measures to provide cheaper funding for some critical sectors of the economy to boost economic activities through its Real Sector Support Facility (RSSF).

CBN Deputy Governor, Dr Joseph Nnanna, had last month hinted about plans to increase the interest rate in response to higher inflation ahead of the general elections in February 2019.

According to Nnanna, virtually all members of the MPC had supported the idea that “the MPR should increase if inflationary pressures build up.”

Nnanna had said, “These factors would warrant a rate increase to send the right signal to the public, that the central bank will tighten policy to respond to higher inflation. There’s a scope to raise rates before the elections in February.

“The central bank is still in the mood for tightening. How fast are we going to tighten is what members haven’t agreed upon.”

Nnanna said while policy tightening by the United States Federal Reserve was a concern, investors still saw Nigeria as an attractive market, thanks to the stable naira and the yield curve on fixed-income instruments higher than in the US or Europe.

But analysts at FSDH Merchant Bank Limited, believe that the most appropriate monetary policy decision under the current economic and financial market situation “is to hold policy rates at the current levels,” saying the need to “provide necessary incentives for the Nigerian economy to achieve inclusive growth negates an option of a rate increase.”

They added in a report obtained at the weekend: “FSDH Research believes the FOMC of the US Federal Reserve may likely raise the Federal Funds Rate (Fed Rate) by 25 basis points when the committee announces its decision on Wednesday, 26 September 2018.

“A rate hike may further increase global yields with its attendant impact on capital flights from emerging markets and demand pressure at the foreign exchange market. Thus, a rate cut in Nigeria is not appropriate under these situations.”

Also, analysts at CSL Stockbrokers Limited, predicted that there would beno change to the MPR nor the CRR.

“We however expect the committee’s tone to be hawkish when providing forward guidance on the path of interest rates.

“In our opinion, the committee appears to be caught in a whipsaw. While we acknowledge that increasing inflationary pressures and capital flow reversals amidst heightening geopolitical and trade tensions, and rising US interest rates provide sufficient justification for a rate hike, domestic economic growth remains fragile and could be truncated by a rate hike,” they stated.

They noted that less-attractive carry trades fuelled by rising US yields had driven up dollar demand by yield-starved foreign investors and could exacerbate exchange-rate pressures as the 2019 general elections draw closer.

In addition, they stated that the uptick in inflation in August following 18 consecutive months of decline suggested a build-up of inflationary pressure.

“That said, armed with considerable reserves to defend the naira albeit in the short term, and with real interest rates still expected to remain positive (we do not expect inflation will rise so fast as to send real interest rates into negative territory), the CBN risks an accelerated pace of inflation and slower economic growth should it hike rates,” CSL analysts stated.

To Financial Derivatives Company Limited (FDC), also pointed out that this MPC meeting will be pivotal in determining the direction of interest rate, especially at a time of new fiscal policy leadership under a new finance minister.

“While the MPC’s decision can either make or mar the present situation, the decision making process will be particularly difficult, given the backdrop of rising consumer prices, depleting external reserves and potential exchange rate pressure

“Political uncertainties are also affecting investor confidence in the Nigerian economy. As the build up to the 2019 general election intensifies, investors are liquidating their portfolios, resulting in a 9.76 per cent decline (quarter-on-quarter) in foreign portfolio inflows into Nigeria in the second quarter,” it added.

CBN Clarifies Capital Injection in Polaris Bank

Meanwhile, the Central Bank of Nigeria (CBN) yesterday clarified its injection of N786 billion into Polaris Bank Limited, a new commercial bank that assumed the assets and liabilities of the defunct Skye Bank.

A top official of the apex bank who spoke with THISDAY on condition of anonymity, said out of the above-mentioned sum, Polaris Bank would refund the N350 billion the CBN previously injected in Skye Bank when it intervened in the bank about two years ago.

Thus, the new bank would be left with N436 billion to stabilise its operations, contrary to the insinuation that a total of N1.136 trillion had been injected in the bank.

The CBN at the weekend revoked the operating licence of Skye Bank Plc exactly 27 months after it intervened in the financial institution. Also, in consultation with the Nigeria Deposit Insurance Corporation (NDIC), both regulators immediately established and licenced Polaris Bank, to assume all assets and liabilities of the defunct Skye Bank.

But the central bank source explained: “When we took over Skye Bank in 2016, we injected about N350 billion. So, from the N786 billion we are bringing in now, Polaris Bank would pay off the N350 billion that had been given to the defunct bank. So, the net injection is just about N436 billion.

“The CBN is injecting something close to capital because the money is going to be there for almost 25 to 50 years. Even though it is a loan, it is not like what was done in 2011, where the money went into a hole and it sank.

“It is not like a grant that is going to sit in CBN balance sheet as a loss. We are treating it as a loan.”

The central bank official reiterated that they took the action on the defunct bank because, “We felt that Skye Bank cannot continue to live on liquidity support from the CBN, but to inject money into the bank.”

He added: “But to do so, you must change the name so that the shareholders of the defunct bank don’t come back to say they own a bank, when the new bank starts doing well.

“The bank they owned was Skye Bank, which has been liquidated.”

Responding to a question on why the board and management of the former bank were retained in the new bank, the source said, “It was deliberate, and we don’t want to do something that is destructive.

“The CBN brought in that management team as we were trying to stabilise. The previous management and board were fired at that time. “But this new board and management has worked and cooperated with the central bank and they have tried to take the bank to a better level.

“The bank has stabilised in terms of haemorrhage. That was why we decided to coast into the new bank, Polaris Bank, with them.”

When reminded that the Asset Management Corporation of Nigeria (AMCON) which had been mandated to sell the new bank as soon as it stabilises has a sunset period, the source said: “First of all, we shouldn’t bother about time frame. Yes, some others have also said the sunset of AMCON is about 2024. If by 2024 it is not sold, whether we like it or not, it is a CBN bank presently.

“Until we have gotten value for our money, we are not going to let it go. If anybody thinks that after sinking such huge amount into the bank, the CBN would sell it to them at a very small amount, they are dreamers. If it stabilises, we would sell it to Nigerians, possibly on the stock exchange and get out our money.”

Meanwhile, the Group Managing Director/Chief Executive Officer of Polaris Bank, Mr.  Adetokunbo Abiru, and the Chairman, Mr. Muhammad Ahmad, in a joint statement at the weekend, urged its customers across the country not to panic.

“All depositors shall be able to conduct their normal banking transactions in respect of such deposits at all branches previously operated by Skye Bank Plc, which branches are now being operated by Polaris Bank Limited,” the bank explained.

They assured customers of liquidity, saying customers “are free to withdraw all their monies without any prejudice, though should endeavour to keep faith with the bank.

“All depositors are further given notice that they are entitled to make withdrawals from their deposits either in full or in part, subject only to any security agreement existing on such deposits, as their accounts are now maintained by Polaris Bank Limited.

“Depositors are strongly encouraged to continue to maintain their deposits and normal banking relationship with Polaris Bank Limited.

“Polaris Bank Limited shall continue to pay interest on all deposits in accordance with any deposit agreement formerly existing between each depositor and Skye Bank Plc as at the date of assumption of such deposit by Polaris Bank Limited.”

Depositors Fully Protected, NDIC Insists

 In a related development, the NDIC has explained that it collaborated with the CBN to carry out the bridge bank option in order to ensure that depositors in Skye Bank are fully protected.

According to the Managing Director of the corporation, Alhaji Umaru Ibrahim, customers’ deposits with Polaris Bank remain insured under the NDIC Act and the customers of Skye Bank can also continue to transact their businesses with Polaris Bank Limited, thereby ensuring the non-disruption of their banking transactions.

“The real job is that of ensuring that the bridge bank is nurtured to a point where it gets investors and is sold.

“Polaris Bank Limited, has been issued operating licence by the CBN and shall commence banking business from the 21st of September 2018; while the operating license of Skye Bank has been revoked.

By the Governor of the Central Bank of Nigeria and the NDIC has commenced the processes for its liquidation.”

He stressed that the adoption of the bridge bank model guarantees that most of the employees of that bank would not lose their jobs and would continue their employment with Polaris Bank Limited under fresh contracts of employment.

“The NDIC, as deposit Insurer, acted to ensure the continued safety of depositor’s funds in furtherance of the regulatory authorities resolve to proactively manage potential threats to financial system stability.

The NDIC hereby assures depositors and customers of the defunct Skye Bank that their deposits are safe and hereby encourages them to continue to transact their normal banking business with Polaris Bank,” Ibrahim added.