Dollar to weaken over $1b inflow into interbank
The Central Bank of Nigeria (CBN)- led Monetary Policy Committee (MPC) will tomorrow and next, be having its second meeting for the year to review major global and domestic economic developments since its last meeting.
The projection is that the MPC will retain the benchmark interest rate- Monetary Policy Rate at 14 per cent, Cash Reserve Ratio at 22.5 per cent and liquidity ratio at 30 per cent.
The meeting will be coming on the back of a continuous decline in the nation’s domestic output, inflationary pressures, weak earning scorecards and forex market challenges, though some improvements seem to have been recorded in fiscal policy and foreign exchange administration.
Also, dollar is likely to weaken this week against the naira as the impact of CBN’s $1 billion injection into the interbank market begins to reflect on rates, the apex bank said yesterday.
The CBN continued its liquidity injection drive last week as it continued Special Wholesale Intervention Forward Sales for maturing Letters of Credit (LCs). Similarly, Deposit Money Banks continued to sell Personal & Business Travel Allowances as well as Tuition and Medical fees.
As a result, exchange rate at the parallel market firmed up slightly. Naira/Dollar exchange rate opened the week at N460.00/$1.00 but appreciated to N455.00/$1.00 by Thursday, before closing the week at N450.00/$1.00.
However, the naira marginally weakened against the Dollar at the interbank market during the week as Naira/Dollar exchange rate fell from N306.00/$1.00 on Monday to N306.75/$1.00 by Thursday before appreciating slightly to N306.50/$1.00. The CBN’s intervention in the interbank market over the past two months shows the highest bid rate was N360/$1, while the lowest was N315/$1.
The foreign exchange market has also recently witnessed increased liquidity on the back of a rise in Foreign Reserves to $30.3 billion as at March 16, 2017 due to a combination of deliberate effort by the CBN to shore-up the reserves and the improvement in global oil prices.
Crude oil price is at $50.05/barrel even as gains from improved domestic oil output, which has seen production improved to 2.1mb/d has continued to impact positively on the reserves.
CBN’s Spokesman, Isaac Okorafor, assured that the regulator was committed to ensuring that the authorised dealers got sufficient supply to meet the demands of genuine customers of banks.
He said the CBN had since February 2017 offered over $1 billion to the interbank market he expressed optimism that stability had been restored to the market, with individuals now being able to easily access forex to address personal and business allowances.
Managing Director, Afrinvest West Africa Plc, Ike Chioke said the CBN’s new forex directives to banks, to provide Personal Travel Allowances and Business Travel Allowances within 24 hours and medical and School Fees within 48 hours to meet demand, has also eased some of the pressures in the parallel market with exchange rate appreciating 14.3 per cent since announcement.
“Whilst we believe the successful implementation of the new forex directive has eased pressure in the parallel market, flexibility in pricing and allocation of forex at the interbank market remains a sine qua non to restore confidence in the system and reinstall a market framework that would lead to a gradual normalisation of rates and also attract the much needed foreign capital into the economy,” he said in an emailed report.
“As the Committee sits to deliberate on Monday and Tuesday, we are of the view that the MPC will maintain status quo on all rates whilst reiterating the need for the CBN to focus on improving forex liquidity in the Foreign Exchange market especially as hinted by the new economic recovery document,” he stated.
Other analysts said a rate cut could dampen CBN’s efforts in squeezing excess liquidity from the system which could hamper the stability of the Foreign Exchange market. On the flipside, a hike in rate may also be sub-optimal at this time as this may further squeeze out liquidity from the banking system as banks may deploy funds towards investment securities while also constraining growth potentials, thus worsening the economic conditions.
The implication on the markets, should the MPC maintain status quo, is expected to be neutral given that most foreign investors are staying on the side-line at the moment against the backdrop of an inefficient foreign exchange market.
“Currently, the equities market remains quiet and driven only by short term speculative trading and fundamentally attractive earnings release. In the fixed income market, we expect investor appetite to remain tilted towards shorter term government securities given the high yield offering which tends to off-set current inflation risk and also inflation expectation,” they said.