CBN May Raise Rates To Woo Foreign Portfolio Investors | Independent Newspapers Limited
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CBN May Raise Rates To Woo Foreign Portfolio Investors

CBN Resists Political Pressure, Retains Rates
Posted: Jul 18, 2016 at 4:30 am   /   by   /   comments (0)

Bamidele Ogunwusi

Lagos – The Central Bank of Nigeria (CBN) may well be at the crossroads going to this month’s Monetary Policy Committee (MPC) meeting on July 26.

It will either jettison its inflation targeting policy or hikes its monetary policy rate to attract foreign portfolio inflows.

Independent investigations reveal that analysts and market watchers seem to support the latter option.

Currently, the MPR at 12 percent is seen as negative since official inflation rate as at end of May trended 15.6 percent. This, according to economic watchers, makes real yields equally negative, serving as disincentive for foreign portfolio investments.

They averred that for the new foreign exchange policy to succeed, the CBN may need greater foreign portfolio inflows.

“The success of Nigeria’s currency liberalisation effort is likely to depend on its ability to attract greater foreign portfolio inflows. Further monetary policy tightening that restores positive real returns is necessary for Nigeria to attract more FX-sensitive, yield-seeking flows. It is also necessary to instill greater domestic confidence in the national currency, the naira,” analysts at Standard Chartered said.

However, they opined that since the nation’s GDP contracted in Q1-2016, it would be unlikely for the monetary authorities to go for any rapid tightening of policy, adding that the foreign exchange inflows needed to support the adoption of currency flexibility are unlikely to materialise unless the authorities attempt to restore greater monetary policy credibility.

“We expect a gradual tightening of monetary policy, with hikes of 200bps each at the July and September MPC meetings, allowing the monetary policy rate (MPR) to end the year at 16 percent, from its current level of 12 percent. Given that June inflation is likely to breach 16 percent, even rate hikes of this magnitude would be consistent with ongoing policy accommodation, as real rates would remain negligible. Nevertheless, a front-loaded raising of nominal interest rates is needed – in our view – in order to instill greater confidence in naira stability,” they noted.

But Matthew Ogagavworia, a financial analyst, said though the proposal seems lofty but the CBN needs to exercise caution as the country awaits the decision of the apex bank’s MPC meeting.

“I know we need foreign investment but I think it is going to be a disaster if we, as a country, have to jerk up out interest rate for the sole aim of attracting foreign investors. We need to look at why they left in the first instance and try to redress it. A policy shift in favour of foreign investments or investors is going to boomerang and we will blame ourselves for it.

“Look, those foreign investors are no fools, they know what is happening here, they know things we don’t know about our country. If you think you are doing something to bring them here, they know it is can only be for short period.”

However, experts at Standard Chartered strongly believe that it is only tightening that could attract the necessary inflows to boost the nation’s foreign reserves.

They specifically noted that with Nigerian foreign reserves pressured by economic fundamentals and a widening of the current account deficit, the authorities would have little option other than to tighten further if they are to attract greater inflows.

“At a time of weak oil prices and threats to Nigerian oil output, foreign portfolio investors are likely to demand higher risk premium in return for investing in local currency fixed income markets. Current negative real yields are unlikely to trigger any change in investor behaviour.”

They equally raised concerns on the renewed banking sector worries, admitting that CBN’s recent interventions in the banking sector pose some risk to the tightening option.

“Despite management changes at a Tier 2 bank, which was found to be under-capitalised, wider banking system concern over foreign exchange loan exposures and rising NPLs (as a consequence of Nigeria’s NGN depreciation) are likely to persist. While the authorities may want to avoid any spike in interbank rates on specific banking credit concerns, this should not preclude any formal tightening,” they pointed out.

They, however, recommended that a higher MPR and a narrowing of the lower corridor around the MPR would create a higher floor for market yields, adding that a higher rate on the CBN’s standing deposit facility, the lower corridor around the MPR, is urgently needed.

They also admit that the authorities’ desire to boost loan growth amid a weak economic backdrop is likely to pose a greater risk to their tightening view but stressed the fact given the CBN’s willingness to provide subsidised credit to specific strategic sectors of the economy this is unlikely to be a blanket hurdle to further near-term tightening.

“Any changes to the policy rate may be offset by specific lending schemes to strategic economic sectors. In the medium term, however, with Nigeria becoming less reliant on oil related inflows to prop up its currency regime, deeper policy changes are likely to be needed. Institutional reforms, aimed at enhancing the credibility of Nigeria’s monetary and fiscal institutions, may go further than expectations of oil inflows in attracting sustained external financing,” they suggested.

Dr. Rasheed Alao, an economist and lecturer, believes that the CBN will be in order if it decided to take the bold step as the country’s economy needs injection of forex and this can only come from foreign investments.

“We need to tell ourselves the truth, the solution to our economic problem is 70 percent of foreign investment and 30 percent of local investments. We will only change this to our favour when we begin to export our goods. I am an optimist in the Nigerian project”.