The Monetary Policy Committee (MPC) meeting which begins today will focus on measures that would strengthen the naira, especially in the face of declining oil price, analysts have said.
In the last six months, crude oil price has plumetted to about $45 per barrel from $100, with its backlash already taking a toll on the local currency as well as the 2015 budget.
Managing Director, Financial Derivatives Company Limited, Bismarck Rewane said the Central Bank of Nigeria (CBN) is likely to consider further depreciation of the naira if the oil price slump persists.
“The hawkish monetary policy stance of the MPC is therefore not expected to change at today’s meeting. However, the monetary authority will be careful since further tightening may be detrimental as the general election is less than three weeks from the scheduled January MPC meeting. Meanwhile, administrative tools will continue to be used to support the monetary policy,” he said.
Continuing, Rewane said the status quo is likely to be maintained at the meeting. “However, threats from increased political spending, growth in money supply, liquidity overhang in the banking system, continued decline in global oil prices, external reserves depletion and a sustained pressure on the naira are underlining threats to consumer price,” he said.
The committee had at the MPC meeting of November 25, moved the midpoint of the official window of the foreign exchange market from N155/dollar to N168/dollar.
It also widened the band around the midpoint by 200 basis points from plus or minus three per cent to plus or minus five per cent.
The committee also increased the Monetary Policy Rate (MPR), the base lending rate, by 100 basis points from 12 to 13 per cent while the Cash Reserve Ratio (CRR) on private sector deposits also rose by 500 basis points from 15 per cent to 20 per cent. It also retained public sector CRR at its current level of 75 per cent. The CRR is a portion of banks’ deposits kept with the CBN.
Analysts said the fall in oil production has created pressure on the public finances, leading to the federal government’s submission of a budget amendment to the National Assembly. “Given this analysis and the modest decrease in official reserves to just below $34.6 billion, the committee is unlikely to trim either the policy rate or the CRR for fear of the impact on the naira exchange rate,” they said.
They attributed the drop in reserves partly to the exit of some offshore portfolio investors after Bernanke’s remarks adding that the position warrants caution from the MPC. “The committee’s view is that the exchange rate has more impact on inflation than interest rates. We would be surprised, therefore, if it was to jeopardise its impressive record on single-digit inflation,” they said.
