AS the Monetary Policy Committee, MPC of the Central Bank of Nigeria, CBN continues its third meeting for the year today, Tuesday, analysts have forecasted that it would retain the Monetary Policy Rate, MPR at 13 percent as in its 100th meeting in March.
Other MPC decisions in March were the retaining of Cash Reserve Ratio, CRR on Private Sector deposits at 20 per cent; CRR on Public Sector deposits at 75 per cent, and liquidity ratio at 30 per cent.
Analysts from FSDH Merchant Bank observed that though there had been changes in the global and domestic economy since the last meeting and now, which may justify changes in its foreign exchange management strategies, an increase in the policy rate and other reference interest rate may not address this, and a reduction would make things worse.
According to FSDH, “we expect members of the MPC to vote to retain the policy rate.
“However, a bold decision to allow the currency to move to its equilibrium level of around US$1/N215-N220 would stabilize the economy.
“The MPC is also likely to increase the CRR on public sector deposits to 100%, in order to fully implement the Treasury Single Account (TSA) for the various tiers of government.”
To arrive at the forecast, FSDH said “the pressure on the economy from high inflation rate was minimal with the latest inflation rate for April 2015 put at 8.7% from the 8.5% in March 2015.
It said, “Our projection shows that the inflation rate would remain in the single digit in 2015. Therefore, the pressure on the economy from high inflation rate is minimal. A hold in policy rate is consistent with the short term inflation outlook.
“The price of Bonny Light in the international market has generally been on an upward trend since the last MPC meeting in March 2015. The Bonny Light price increased by 20.87% to US$65.90/b on May 12, 2015 from US$66.24/b on March 24, 2015.
“The short term outlook of the oil market shows that the supply outweighs the demand and this would put downward pressure on prices and consequently on foreign exchange rate. The successful conduct and the acceptance of the general elections brought about a temporary relief for the value of the Naira.
“However, there has been increasing divergence between the inter-bank and parallel markets rates in recent weeks due to the supply shortages of the U.S. Dollar in the market. In addition, the current control in the inter-bank foreign exchange market has technically reduced the inter-bank trading, and this needs to be resolved.
“An appropriate foreign exchange policy to attract short-term foreign exchange inflows into the market would help to fill the current excess demand in the foreign exchange market. The pressure on the external reserves has become relatively modest in recent time.
“The recent rally in the price of crude oil at the international market has not been fully reflected in the external reserves due to the various interventions the CBN had to carry out at the inter-bank foreign exchange market. However, the external reserves have been on a gradual upward trend since April 23, 2015, moving from US$29.51bn to US$29.76bn on May 13, 2015 but still lower than the closing figure of US$29.89bn as at the last MPC meeting of March 24, 2015.
“It is no longer sustainable to rely on the external reserves to meet foreign exchange demand. Doing this may make the country’s external reserves to drop below the critical threshold of 3 months of import cover.
“Looking at the current economic development and the short-term outlook, the major pressure the economy faces is the excess demand for foreign exchange in the face of a shortage in supply. An increase in the policy rate and other reference interest rate may not address this; and a reduction would make things worse.”
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