Analysts see MPC retain interest rate at 13.5% Amidst rising inflation

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As the May 2020 meeting of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) holds this Thursday, a financial expert, Mr Lukman Otunuga, has forewarned Nigerians not to expect a repeat performance of its March 26, 2019 rate reduction.

According to Otunuga, a Senior Research Analyst at FXTM, “repeated signs of rising inflationary pressures in Nigeria have squashed hopes over the CBN’s cutting interest rates to stimulate economic growth.”

The MPC, in its March 2019 meeting, had cut the MPR, also known as the main interest rate, from 14 per cent to 13.5 per cent. Giving reason for this, the CBN Governor, Mr Godwin Emefiele had said:

“The committee was convinced that doing this will further uphold the bank’s commitment to promoting strong growth by way of encouraging credit flow to the productive sector of the economy.”

In his email to investors last week, shortly before the April inflation numbers were released by the National Bureau of Statistics (NBS), Otunuga said:

“The annual inflation rate in Africa’s largest economy rose for the seventh straight month to 12.26 per cent in March amid border closures and the new VAT tax rate. Given the Naira’s weakness over the past few weeks amid severely depressed oil prices, inflation is forecast to hit 12.9 per cent in April. Such a figure may place the CBN in a tight spot, especially if first quarter GDP figures, scheduled for release next week, confirm that Nigeria experienced an economic contraction last quarter.”

But the April figure fell short of Otunuga’s forecast. In a monthly data report released by the NBS on Thursday, the inflation rate increased just by 0.08 per cent points higher than 12.26 per cent rate recorded in the previous month.

On month-on-month basis, the headline index increased by 1.02 per cent. This is 0.18 per cent rate higher than the rate recorded in March 2020 (0.84 percent).The corresponding 12-month year-on-year average percentage change for the urban index is 12.26 per cent in April 2020.

As for Otunuga’s observation on “the Naira’s weakness over the past few weeks amid severely depressed oil prices”, the local currency has been under pressure from importers and foreign currency speculators. But last Friday, the Naira moved up to N385.94 at the Investors and Exporters (I&E) window as the apex bank’s intervention in the foreign exchange (forex) market intensifies. The Naira rose by 56 kobo against the dollar, when compared to the N386.50 to a dollar that was traded the previous day.

The exchange rate at the I&E window is different from the CBN’s published exchange rate, which currently stands at N360/$1. This is also different from the exchange rate at the parallel market, which is still stable at N460/$1, according to information on AbokiFX as of Friday, May 22, 2020.

Available information from the daily trading at FMDQ (where forex is traded by importers and investors) showed that the Naira improved against the dollar by N1.67, closing at N385.94 to a dollar, as against the indicative rate of N387.61 to a dollar that it opened with on Friday. The exchange at the start of the week was N386.

Further analysis of the information from the FMDQ shows that the turnover for the day was up by about 30.6 per cent at $29.38 million. This is against the $22.5 million turnover that was recorded the previous day.

The improvement of the naira at the Investors and Exporters window is coming on the heels of improved liquidity at the forex market.

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