Interest rate should remain at 12% —Analysts

The Central Bank of Nigeria will probably reinforce its anti-inflation mandate by holding its key interest rate at a record high on Tuesday (today) as consumer prices ease.

The Monetary Policy Committee led by the CBN Governor, Mr. Lamido Sanusi, will keep the rate at 12 per cent, according to all nine economists surveyed by Bloomberg.

Sanusi is scheduled to announce the decision at a news conference in Abuja on Tuesday.

The CBN has maintained the benchmark rate since October 2011 to help to stabilise the naira and keep price pressures under control.

While that has helped to bring inflation down to the lowest level in more than five years, it may not be enough to persuade the MPC to ease borrowing costs as the country faces the threat of rising government spending in a pre-election year.

Bloomberg quoted a senior macroeconomics specialist in London at EBI SA, a unit of Ecobank Group, Mr. Gaimin Nonyane, as saying, “I would expect the CBN to keep its policy rate unchanged. The probability of a rate cut is also low given growing potential for fiscal slippage amid weakening oil revenue and expenditure overruns ahead of the 2015 general election.”

The inflation rate fell to 7.8 per cent in October from eight per cent in the previous month as food prices eased, the National Bureau of Statistics stated, adding that prices rose by 0.8 per cent in the month.

Nigeria relies on oil for about 80 per cent of government revenue and 95 per cent of export income. The report recalled that the price of crude had slumped by 12 per cent in New York in the past four months and was trading as low as $93.63 a barrel on November 15.

President Goodluck Jonathan is due to present his 2014 budget to the legislature on Tuesday (today), amid concern among investors that unplanned public spending may rise next year as campaign begins for the 2015 election.

It said unchecked government spending could lead to more rapid inflation and exert pressure on the local currency, which the central bank planned to keep within a range of three per cent either side of N155 to the dollar.

The naira has lost one per cent against the dollar in the past six months to trade at N159.30 on the interbank market as of 5 pm in Lagos on November 15, according to Bloomberg.

Sanusi, whose term expires in June, 2014, said in an interview last month that the bank had no plans to cut the interest rate as it would concentrate on containing inflation.

The Head of Research and Intelligence, BGL Securities, Mr. Femi Ademola, also predicted that the MPC would retain the MPR at 12 per cent.

He said adjusting the MPR might mean reversing all the CBN had achieved in terms of single-digit and lower inflation rate.

Ademola said, “The decision might be to retain the MPR at 12 per cent. However, the MPC is not only looking at inflation; they are also looking at the exchange rate and liquidity. At the moment, there is still volatility in the exchange rate; there is also liquidity in the system. So, the MPC may decide to increase the Cash Reserve Requirement. It may also increase the liquidity ratio to 35 per cent for the big banks in an attempt to sterilise more funds.”

The financial analyst also noted that the CBN might step up its Open Market Operation by selling more Treasury Bills to the public.

The BGL, in its analysis ahead of the MPC meeting, had written, “Ahead of the Monetary Policy Committee meeting scheduled to hold on Monday November 18th –Tuesday November 19th, 2013, we review the short term developments in the prices, monetary, financial and exchange rate environment since the last MPC in the bid to provide insight into the likely direction of decisions at the meeting.

“We argue that there is little or no incentive for the committee to change its position on the Monetary Policy Rate at this MPC meeting. Considering the evolving money market liquidity scenario, however, the committee may consider a further deployment of the Cash Reserve Ratio or other liquidity management tool to address the supposed liquidity surfeit.

“In this regard, while we expect a hold on the MPR, it is not unlikely that other indicators including the CRR and LR may be used for varied reasons as identified above. We also expect to see an increase in OMO operations in the aftermath of this MPC until the end of the year.”

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