MPC decisions heighten exchange rate pressures

By Odunewu Segun

The decision to maintain the status by the Central Bank Nigeria at its last Monetary Policy Council meeting has increased uncertainty in the economy and heightened exchange rate pressures. The decision to maintain status quo does not do much to support the stock market as sell pressures caused by speculation on possible naira devaluation are expected to persist.

At the end of its January 25-26 meeting, the MPC voted unanimously to maintain status across the policy variables as: MPR is still at 11%, CRR at 20%, LRR at 30% while it maintain the asymmetric corridor of +200bps/-700bps around the MPR

The decision is unlikely to incentivize international investors, many of whom have remained on the sidelines.   Furthermore, the inflationary impact of a currency adjustment will be avoided for now.

Speculative attacks and uncertainty with regards to a possible exchange rate adjustment will continue to mount, thus weighing down on the currency.

In addition, with the exchange rate still pegged at N199/$ at the IFEM, unethical practices such as round-tripping will persist. The level of external reserves is likely to deplete to $25bn as the CBN continues to defend the currency.

There will be further uncertainty in the economy unless the CBN implements measures to stem pressures at the forex market. There is not a more critical time for the CBN to implement a flexible exchange rate policy than now. This will bridge the gap between the official rate and parallel market rate which is currently at N105.

While acknowledging current global economic challenges and the domestic macroeconomic headwinds, the Committee concluded to foster its last decision (in November meeting) of pursuing real growth without losing sight of price stability.

In a bit to allow for a reasonable time lag to see the impact of its previous resolve, the Committee acknowledged and pointed out the need for more coordinated monetary-fiscal harmony, especially as it pertains to the fiscal authority’s economic roadmap for 2016.