…warns naira speculators
Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, said on Tuesday that he is optimistic that exchange rates at the interbank and parallel windows would soon converge following the apex bank’s latest stance to provide liquidity in the market, stabilize the naira and punish those taking bait on the local currency.
Emefiele’s confidence is buoyed by improved oil earnings on the back of higher international crude prices and relative peace in the oil rich Niger Delta region which has helped push up reserves, giving the CBN the recent audacity to sustain dollar injections into the market.
In the past five weeks, CBN has injected well over $1billion into the market to meet both forwards demand and those for invisibles as Nigeria’s foreign reserves rose substantially, settling at $31 billion as at Tuesday.
“I am happy that those interventions have proved very positive,” Emefiele said.
“We have seen the rates now converging and we are strongly optimistic, very, very optimistic that the rates will converge further,” the governor added, speaking after the two days meeting of the CBN’s Monetary Policy Committee (MPC) which retained key benchmark rate- the Monetary Policy Rate at 14 percent for three straight time.
The apex bank also left the Cash Reserve Ratio unchanged at 22.5 percent, Liquidity Ratio at 30 percent as well as the asymmetric corridor around the MPR at +200 basis points and -500 basis points.
Emefiele also assured that the CBN would sustain its present serial interventions in the Foreign Exchange Market as he warned that those taking a bait on the naira would loose “real big”.
“In terms of sustainability, I think it is important for us to say that reserves at this time still trending upwards to almost close to $31 billion as I speak with you and the fact that we have done this consistently for four to five weeks should tell everybody or those who doubt the strength of Central Bank to sustain this policy, for me to say that they are taking a risk and they will loose in this bid to want to place a wrong bait on the direction that we are going,” he added.
“The direction is that there is a determination to see to the convergence of those rates and with what we have seen so far, we are very optimistic that those rates will converge. And all the elements on the foreign exchange market will no doubt be implemented.
“It is a programme and I am happy to say that, that programme is on course and I am happy that it is looking good, infact beyond our expectation and those who still remain on the sidelines, doubting the level of CBN’s ability to sustain this policy are on the wrong side on the bait,” the governor stated further.
Briefing journalists on the outcome of the meeting, Emefiele said retaining rates was most suitable at this time to sustain slight improvements in inflation, exchange rate and particularly so that the bank will not be seen as being insensitive to the present tight economic conditions.
“The benefits of loosening at this term would be in line with the plans of the fiscal policy to restart growth. The MPC however notes that loosening will exacerbate inflationary pressure, worsen exchange rate and further pull the real interest rate into negative territory. Since interest rates are sticking downwards, loosening may not necessarily transmit into lower retail lending rate,” Emefiele stated.
CBN’s decisions align with many analysts’ expectations. Inflation stood at 17.78 percent in February, the lowest in 15 months. Though the country still remains in recession, economy contracted slower than the previous months by -1.30, according to from figjures National Bureau of Statistics (NBS), raising hope of recovery in 2017.
In taking the decision, the CBN, according to Emefiele evaluated other challenges confronting the domestic economy and the opportunities for achieving price stability, conducive to growth in 2017. In particular, the CBN factored in persisting inflationary pressures; continuing output contraction; high unemployment rate; elevated demand pressure in the foreign exchange market; low credit to the real sector and weakening financial system indicators, amongst others.
Emefiele said though the arguments for tightening policy where strong and persuasive, including real policy rate which remains negative, upper reference band for inflation remains substantially breached and elevated demand pressure in the foreign exchange market but voted against it because “tightening at this time would portray the Bank as being insensitive to growth.”
“Also, the deposit money banks may easily reprice their assets which would undermine financial stability,” Emefiele explained.
The governor said the CBN also considered the arguments for loosening the stance of monetary policy, noting its desirability in stimulating aggregate demand if credit increased with lower rates of interest.
The strong argument was that loose monetary policy was capable of delivering cheaper credit, making it more attractive for Nigerians to acquire assets, thus increasing wealth and stimulating aggregate spending and confidence by economic agents, which would eventually lead to lower Non-performing loans in the system.
“However, the counterfactual arguments against loosening was anchored on the upward trending month-on-month inflation and its impact on the exchange rate. “Loosening would thus worsen the already negative real interest rate, widen the interest rate spread and reverse the positive outlook for the current account position,” Emefiele told journalists.
The CBN is also optimistic that the implementation of the newly released Economic Growth Recovery Plan, the new foreign exchange policy as well as the current effort by the Federal Government to restore peace in the Niger Delta region would help revive economic growth and stabilize prices.
But the CBN sees downside risks to the economic outlook to include the possibility of a slower-than-expected rate of global economic activity, tight monetary policy stance by the U.S. Fed, resulting in strengthening U.S dollar, and low oil prices.
On outlook for financial stability, the Emefiele raised the concerns that the banking sector was becoming less resilient as a result of the adverse macroeconomic environment and that the will work with DMBs to promptly address rising Non Perfoming Loans, declining asset quality, credit concentration and high foreign exchange exposures.
