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CBN may raise interest rate tomorrow

By on March 26, 2011

The Central Bank of Nigeria (CBN) may raise its benchmark interest rate (Monetary Policy Rate (MPR) for a second time this year as its Monetary Policy Committee meets in Abuja tomorrow.

The MPR is the interest rate at which the banking watchdog lends to commercial banks.

Experts have, however, differed on whether there is the need to raise interest rate, leave it unchanged, use the country’s reserve to fight the pressure on the naira or allow CBN’s recently introduced liquidity management measures (Cash Reserve Requirement Averaging) and FX forward sales to take full effect on the economy.

The banking watchdog had increased the rate by a quarter of a percentage point to 6.5 per cent on January 25 to help meet its target of bringing inflation, which stood at 11.1 percent last month, to below 10 per cent.

Out of the four experts who spoke with The Nation, two supported a rise in rate, while one said the CBN should use the country’s reserve, which stands at $36billion to defend the naira that has been under pressure in the last one month. The other believes that the CBN’s recently introduced liquidity management measures (Cash Reserve Requirement Averaging) and FX forward sales should be allowed to take full effect on the economy.

The Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, who predicted a one point increase in rate, insisted that there is the need to increase the rate to discourage people from taking a bet at the parrallel market.

“The most appropriate thing is for the CBN to raise the rate by 0.75 or one percentage point. This would prevent people from taking a bet at the parralel market. People would be discouraged from borrowing naira to take positions in the market because they would have to pay more,” he said.

Rewane, who predicted that the naira may depreciate to N155 for a dollar before end of the year, said the country’s foreign reserves may also rise to about $40billion as a result of the crises in Libya and the global increase in demand for crude oil, which, is currently over $100 per barrel.

The Group Managing Director of one of the big banks in the country, who opted not to be quoted, also supported the need for the rate to group.

Noting that there has been so much pressure on the naira with the CBN not being able to meet the foreign exchange demand at the offcial market (the bi-weekly Dutch Auction Sysytem), he said there is need to raise interest rate.

The CBN, he said, would not support a devaluation of the naira and is, therefore, likely to raise the rate by some 50 basis points to seven per cent.

He said the current high demand for foreign exchange was as a result of next month’s elections.

The naira, which has remained fairly stable, weakened to its lowest level in 18 months against the dollar at the inter-bank market last Friday, depreciating 0.1 percent to N156.30 per dollar. At the CBN moderated forex market last Wenesday, the naira lost 11kobo, as it traded at N151.01 compared with N150.90 of  last Monday. At the parallel market otherwise known as the black market,  a dollar, which exchanged  at N154.50 last Monday traded for N156 last Friday.

The Managing Director, Syke Bank Plc, Durosinmi-Etti, had also last week told Reuters in London that the CBN would raise rate.

Sanusi “doesn’t have a choice,” he said. “It’s the rational thing to do. In a case where the rates are fairly low, can they be sustained at those levels if inflation stays high and the money supply is high in the economy?”

But the Chief Executive Officer, Economic Associates, a Lagos economic consultancy, Dr. Ayo Teriba, thinks otherwise.

He said the panic about the naira had nothing to do with the domestic economy and, therefore, does not warrant an increase in rate.

Noting that the pressure on the naira is temporary, he suggested that the CBN should use the external reserves to defend the naira.

“The pressure on the naira was imposed by the Tsunami in Japan, the soverign credit rating downgrade in Europe and that means the value of guarantees will be eroded. So, because of wealth owners illiquidity at their home countries, they would need to convert their funds to take care of cash needs at home.

“The CBN should use the Open Market Operations like it did last year to contain the effect of the Euro crises. It should also use the reserves to defend the temporary liquidity pressure. Hiking the interest rate will make life difficult for consumers, investors and Nigeria,” he said.

Teriba’s view was also corroborated by the Research Department of Access Bank Plc, which did not also support raising the rate.

“Our position is that the Committee would keep its key policy rate unchanged at 6.5% and allow CBN’s recently introduced liquidity management measures (Cash Reserve Requirement Averaging) and FX forward sales to take full effect on the economy. This is because an immediate tightening at the meeting would put the already jittering domestic money market rates further on an upward trajectory.

“We believe that CBN respective credit schemes via the Bank of Industry (BOI), as well as plan to guarantee the injection of Pension Funds into key sectors of the economy (to boost credit to the private sector) would help to address some of the country’s GDP growth constraints, while focusing on balancing the upside risk to price stability and downside risk to growth, amid rebound in stability of the financial system,” experts at Access Bank said.

But the CBN Governor, Sanusi Lamido Sanusi, had also signalled in a March 4 Reuters interview that he may raise the rate.

He said the apex bank would adopt further monetary policy tightening measures in a “steady and stable” manner so as to tame inflationary pressure in the country.

Source : The Nation