Industry experts see the CBN still being able to bring down rates both tactically and explicitly by 2H 2015 despite the present tough monetary environment.
The Naira has depreciated by 7.2 per cent against the dollar from the beginning of the year, rising from N159 per USD to N172.39 per USD Ytd. Additionally, oil, the country’s main export commodity and highest FX source, has seen its price tumble to below $80 per barrel – a four year low.
The nation’s monetary policy committee has been restrained in its ability to raise rates further to bolster the value of the Naira, given the substantial tightening it embarked on in 2011 to combat inflation. The last rate hike was a 275 basis points jump from 9.25 percent to 12 percent in 2011.
Also, the CBN governor, Godwin Emefiele, has set lower interest rates as a key focus of his tenure.
Additionally, on the FX side, CBN reserves have dropped from N43 billion at the beginning of the year to N37 billion at present. Given falling oil prices, many view the CBN at the risk of burning through reserves at a faster rate than normal, should it choose to continue to defend the value of the Naira.
This has left many pundits to forecast a devaluation of the Naira as the only way out.
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Nonetheless, despite this tumultuous monetary environment – the bearish outlook for the Naira, falling oil prices and FX reserves – analysts still see the CBN creatively and explicitly lowering interest rates.
Gregory Kronsten, Chief Economist at FBN Capital said doing a presentation at the 2014 FBN Annual Investor Conference, that “tightening is likely to start this month, likely the CRR, with the policy rate at 12 per cent until a token ‘feel good’ cut in 2H 2015”.
The MPR is expected to be left unchanged at 12 per cent, until 2H 2015, when Kronsten forecasts the MPR will be cut to 11.5 percent.
Rewane Bismarck, MD, Financial Derivatives Company said at the conference, “The CBN can let the exchange rate float – much like what we have seen in Russia, and allow it depreciate by 5 to 8 percent. This will allow them bring the interest rate down”; speculating on a tactical devaluation of the Naira to allow for a rate cut.
“The N7.5 billion cap on SDFs brought rates down technically”, he further points out.
On devaluing the Naira, Bismarck explains that the recent strengthening of the dollar does not necessarily mean that the Naira has weakened. “There has been a global shift in currency values”, he said.
Most global currencies have depreciated against the dollar, leaving Nigerian manufacturers at a disadvantage, compared to West African economies with currencies such as the CFA franc pegged to the Euro, he further explains.
On the long term outlook on monetary policy, Bismarck points out that there is a need for some monetary adjustment on a background of a Marshall plan after elections. He points out that the economic transmission has been faster than the political transmission.
Yvonne Mhango, an economist at Renaissance Capital stated in a report released in August that the CBN would lower interest rates as early as 2H 2015. “There would be no changes in the policy rate in 2H 2014 until 2H 2015 when rate cuts are to be expected”, she stated in the report.
YINKA ABRAHAM
