The Central Bank of Nigeria (CBN) yesterday raised its benchmark monetary policy rate (MPR) by 200 basis points to 14 percent from 12 percent in June, in a bid to achieve price stability, and attract greater dollar inflows.
To reap the benefits of global investors’ search for higher yield in emerging markets, Emefiele said the CBN had no option but to attract investors with positive interest rates amid an inflationary environment.
“At the end of a voting exercise to reach a consensus for the monetary policy rate, five members of the Monetary Policy Committee (MPC) voted to raise rates to 14 percent, while three wanted rates unchanged,” said Emefiele at a press briefing in Abuja, at the culmination of a two-day meeting of the MPC.
Analysts had said naira yields may have to rise to near 20 percent before bond investors are keen to re-enter the country, as naira devaluation falls short of attracting offshore fund managers.
Nigeria’s government bond yields of 15.1 percent are the highest after Egypt, among 31 emerging markets tracked by Bloomberg, and are negative in real terms, with Nigeria’s inflation accelerating to 16.5 percent in June.
The move to normalise yields and a more orthodox monetary policy are a step in the right direction say analysts.
“Given the cost-push nature of inflation in Nigeria, which largely stems from the shortage of FX, we believe that this was the right thing to have done. It demonstrates a commitment to FX liberalisation, which alone will undo some of the bottlenecks that have contributed to inflation,” Razia Khan, Africa Chief economist at Standard Chartered Bank, said.
“Establishing more credible policy and attracting greater inflows is about as pro-growth as policy can be, given the challenges currently facing the Nigerian economy. Today’s tightening was an important step in re-establishing the credibility of monetary policy in Nigeria, and should allow for a gradual recovery in FX inflows.”
According to Omotola Abimbola, head, investment research, Afrinvest Securities limited, the MPC’s decision comes as no surprise.
“We believe expectations have been carefully guided towards a rate hike via aggressive liquidity tightening post-implementation of the liberalised FX market. This only goes to confirm the commitment of the CBN to a more conventional management of monetary policy, focusing on its price and exchange rate stability objective.
Abimbola says the economy will benefit from a confidence-lift in the CBN and the return to conventional management will buoy foreign investors’ interest in Nigerian assets which in the short term could spur foreign capital inflows into the FX market and reduce the burden of funding Nigeria’s twin deficit: fiscal and current account.
“This would definitely buy more time for the fiscal and monetary team to concentrate on longer term policy reforms to make the economy more competitive,” Abimbola said in an emailed response to BusinessDay.
In his emailed response, Bolade Agboola, executive director, Cashcraft Asset Management, said the hike in MPR from 12 percent to 14 percent is a policy response to spiralling inflationary rate currently 16.5 percent, the highest in the last two decades.
“The hike might be a strategy to assure patronage of government debt instruments for funding the budget deficit which is critical for spending to exit recession and grow the economy again. Meanwhile the tepidity of the stock market may be further elongated, as the hike in MPR boast returns on alternate investments in money market instruments by 200 basis points.
“Only promising half year corporate results can change the current trend in the stock market,” Agboola said.
Addressing journalists after the meeting, Emefiele said, strategic health of the banks are strong.
“No doubt there has been weakening in capital adequacy ratio, liquidity and NPL but not to the extent that it create any panic or worry to anybody, any stakeholder in the Nigerian banking industry. I seize this opportunity to say that the strategic health of the Nigerian banking or financial institution remains strong at this time. There is no need for anybody to begin to panic or worry that any bank is in distress.
“We took certain actions about the activities or to express our unhappiness over the misdemeanour in the activities of certain board and management of a bank and doing that does not mean that bank is in distress,” Emefiele said.
Standard Chartered Bank’s Khan, says given the pledge to gradually restore positive real interest rates, she expects another 200 basis points hike in the policy rate to 16 percent at the September MPC meeting.
“Nigeria embarked upon the path of reform (FX liberalisation, fuel price deregulation, transparency initiatives, efforts to boost revenue mobilisation, power sector reforms), all with a view to easing the economy’s transition to lower oil prices, and creating the foundation for more sound long-term growth, we think that today’s MPC decision represented an important initial step in the right direction.”
PATRICK ATUANYA, ONYINYE NWACHUKWU, HOPE MOSES-ASHIKE & LOLADE AKINMURELE
