UNITED States import prices fell only slightly in September, offset by recovering oil prices, suggesting a slowdown in the rate of imported deflation is occurring, which may eventually allow the Federal Reserve to raise interest rates.
The Fed held off from raising interest rates in September largely because a weak global economy and financial market volatility had raised doubts that U.S. inflation would rise toward the Fed’s target of 2.0 per cent as expected.
U.S. import prices fell only 0.1 per cent last month in data reported by the Labor Department on Friday, and import prices, excluding oil, fell 0.2 percent, which was half the pace of the declines registered in July and August.
Analysts had expected overall import prices to decline more, by 0.5 percent, and the U.S. dollar strengthened slightly against a basket of currency following the data’s release. U.S. stock prices were little changed.
“Today’s report suggests a significant slowing in the rate of imported deflation,” said Blerina Uruçi, an analyst at Barclays.
A surge in value of the U.S. dollar last year, fueled by expectations that a strengthening U.S. economy would lead to higher interest rates, has been a factor pushing down inflation, as evidenced by declines in non-oil import prices.
Federal Reserve Chair Janet Yellen, who said late last month the Fed was likely to raise rates by year end, has argued that the disinflationary impact from imports was bound to fade and that U.S. inflation would then trend higher. Friday’s data appeared consistent with that view.
Already, declines in oil prices have moderated after a late 2014 plunge, and prices for imported oil rose 1.1 percent in September after declining sharply in August.
Crude oil prices have actually trended higher over the last month. The dollar, which strengthened sharply in the second half of 2014, has weakened since March.
The Labor Department data also showed the price of imported consumer goods other than cars actually rose 0.1 percent in September, the first gain since February. Imported car prices were flat.
Still, the data also pointed to ongoing weakness in global demand that is weighing heavily on U.S. factories and other exporters. Export prices fell 0.7 per cent, more than the 0.2 per cent decline forecast by economists.
A separate report from the Commerce Department showed a rise in wholesale inventories that could point to unwanted inventory build-up, which could weigh on manufacturing and economic growth.
UNITED States producer prices were flat last month, pointing to benign inflation pressures that could weigh on the Federal Reserve’s decision whether to hike interest rates next week.
The unchanged reading in the producer price index last month followed a 0.2 percent gain in July, the Labour Department said on Friday. The drag on producer prices from lower crude oil prices and a strong dollar was offset by an increase in profit margins for apparel, footwear and accessories retailing.
In the 12 months through August, the PPI fell 0.8 percent after a similar decline in July. It was the seventh straight 12-month decrease in the index.
Tame inflation despite a rapidly tightening labour market poses a dilemma for Fed officials who are contemplating raising rates for the first time in nearly a decade.
Though job openings are at a record high and the unemployment rate is at a 7-1/2-year low, wage gains have been lacklustre. That has helped keep inflation well below the Fed’s two percent target.
The U.S. central bank’s policy-setting committee meets on Sept. 16-17. The likelihood of a lift-off in the Fed’s benchmark overnight interest rate has been diminished by recent financial market volatility, which was sparked by concerns over China’s economy.
U.S. stock index futures extended losses after the PPI data, while the dollar added to gains against a basket of currencies. Prices for U.S. government debt rose.
Economists polled by Reuters had forecast the PPI dipping 0.1 percent last month and falling 0.9 percent from a year ago.
Producer inflation is likely to remain muted in the near term after a report on Thursday showed import prices fell 1.8 percent in August, the largest drop since January.
The index for final goods fell 0.6 percent last month, with a 7.7 percent decline in gasoline prices accounting for nearly two-thirds of the drop. There also were decreases in the cost of jet fuel, grains, light motor trucks, and iron and steel scrap.
Wholesale food prices rose 0.3 percent in August as the impact of an avian flu outbreak early this year continued to linger. Food prices slipped 0.1 percent in July. Wholesale chicken egg prices rose 23.2 percent last month after falling 24.2 percent in July.
The volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, shot up 0.9 percent in August after rising 0.4 percent in the prior month. Almost half of the increase in August was attributed to a 7.0 percent surge in margins for apparel, footwear and accessories retailing.
A key measure of underlying producer price pressures that excludes food, energy and trade services edged up 0.1 percent in August after rising 0.2 percent in July.
The dollar’s 17.5 percent rise against the currencies of the United States’ main trading partners since June 2014 is restraining gains in the so-called core PPI.
Core PPI was up 0.7 percent in the 12 months through August.
Wild swings in world financial markets this week have shown how events in China can potentially disrupt the Federal Reserve’s carefully scripted policy plans. The turmoil, triggered by a rout in Chinese markets, also flagged a broader risk that the U.S. central bank may struggle to meet its inflation target until the rest of the world plays along.
As they try to nudge U.S. interest rates away from zero, policymakers might have to rethink a basic assumption that solid economic growth and swelling payrolls at home are enough to do the job even as the world’s second-largest economy stutters.
“The years when China could keep on growing and pump things up – that’s over. So you look around the world and ask who can take up the slack, and really the answer is nobody,” said Kevin Logan, chief U.S. economist at HSBC Securities, in New York.
“I don’t see how it’s possible that inflation will be picking up in the United States. We’re just going to have a stronger dollar, falling commodity prices, growth prospects that aren’t that good, more competition from imports in the U.S. market so that labor won’t have any bargaining power and wages won’t be going up.”
Only days ago, Fed officials had appeared ready to push interest rates higher in September based on a sense of “reasonable confidence” that inflation would rise to the central bank’s 2 percent target.
Now, they are admitting things got more complicated after a rollercoaster week in financial markets caused by fears that China’s gradual slowdown could turn into a crash landing.
New York Fed President William Dudley said on Wednesday that the prospect of a September rate hike “seems less compelling” than it was only weeks ago, even if he warned about overreacting to “short-term” market moves.
Global central bankers meeting this week at the annual Federal Reserve retreat in mountainous Jackson Hole, Wyoming, are likely to focus on recent market turbulence, the divergence between the world’s two biggest economies and the question what is driving inflation in the post-crisis world.
The recent market swoons follow a series of other shocks – crashing oil prices, weakness in Europe, the constant deflation threat in Japan – that have held down inflation globally.
Up to now Fed officials have argued those problems would have only a passing effect on U.S. prices, even as they kept pushing the timeline for reaching their inflation goal further into the future.
Part of the logic of the Fed’s two percent inflation target is to allow the central bank to lift its benchmark rate and build a cushion for monetary policy to respond to any new economic threat without tightening inflation-adjusted rates too much.
Some economists, however, question long-held views such as that rising employment will eventually drive up wages and inflation, pointing out that global forces now play a prominent role in that equation.
The opening up of markets in former Soviet bloc countries, China’s entry into the World Trade Organisation, regional free trade pacts have all allowed capital and goods to move more freely, helping to even out and hold down costs.
In fact, as U.S. imports have increased to 15 percent of the national output by the middle of last decade from around 10 percent in early 1990s, inflation has been tracking import prices more closely, with headline inflation over that period matching the increases in prices of non-oil imports.
Some analysts have also said that globalisation has been a factor in holding down U.S. wages and prices even at times of solid growth.
Over the past year, the dollar’s rise has served as another anchor on consumer prices.
A rebound in U.S. stock prices and a sharp upward revision in U.S. second quarter growth numbers may ease some fear that slow growth and volatility overseas will dull the U.S. recovery.
But renewed disinflationary impulses from around the globe could still make the Fed more cautious and intensify the effort to better understand how inflation works.
Some basic tenets are now in flux, also at least partly because of globalisation. Some researchers, for example, argue that “core inflation” – which strips out food and energy prices and is often used by bankers as their preferred gauge – may be less relevant in a world where futures contracts, global shipping and worldwide trade help even out retail level price swings for some of those goods.
It is also far from clear how economies behave when interest rates are stuck at zero, as they have been in the United State since 2008.
“I look at data and I think that we are in an unusual situation,” Michael Owyang, assistant vice president at the St. Louis Federal Reserve Bank, told Reuters. “I don’t have a good model for what is happening. I have not seen these conditions before.”
As Nigeria fights to beat back raging inflation, many of its small and medium-sized enterprises (SMEs)—disadvantaged even in good times — are struggling to survive the battle, the President, Association of Micro Entrepreneurs of Nigeria (AMEN), Prince Saviour Iche, has said.
The net effect of inflation, he said, is high on businesses, creating a kind of worst case scenario for companies struggling to cope with high inflation and high interest rates.
According to him, small businesses are facing a tough situation, adding that the pain they endure runs deeper, with roots in policy shortcomings that need to be addressed by the new regime if the country is to shift to a more balanced and dynamic economic model.
While other factors are impacting negatively on the economy, Iche said plunging revenue as a result of the state of the economy was making it difficult for small businesses to make a profit not to talk of recruiting new hands.
Interestingly, according to him, a number of Nigerians are interested in starting new businesses, but the greatest challenge is the dearth of financing, adding many banks are reluctant to lend to the sector for a variety of reasons.
To encourage more Nigerians to be self -employed, he urged the government to address the challenge of creating a dynamic SME sector, adding that the current national macroeconomic woes, reflected in Naira depreciation ito make matters worse.
He said private companies and SMEs have remained small in scale because of low competitiveness and an unfair business environment. It was for this reason that the companies should receive support from the Government to access loans, he added.
Government, he said, should be supportive by providing markets, land, preferential loans and technology, as well as training and management, adding that SMEs constituted the majority in the business community and that they have played a vital role in the economy by providing jobs, increasing income and mobilising resources for investment in development and poverty reduction.
With the naira stabilising and oil price rising from an all-time low of $56 per barrel, things are looking up again. But there is no cause to cheer yet because of the rising inflation, reports COLLINS NWEZE.
Although the naira closed at N197 to the dollar at the interbank last week, it still exchanges at N210 at the parallel market. It has remained in that threshold for nearly six weeks.
With the last general elections peaceful and a gradual rebound in oil price, the naira is stabilising. But the downside is that inflation rose from eight per cent in December to 8.5 per cent in April.
At its weakest, the naira sold at a record low of N235.60 to the dollar, a decline of 30 per cent since November. The naira also dropped to N220 at the parallel market before the Central Bank of Nigeria (CBN) closed the Retail Dutch Auction System (RDAS) in February.
Also, the foreign exchange reserves fell by 10.04 per cent to $28.87 billion by March 4, from $33.94 billion a month earlier.
Although the currency stabilised at N197 to dollar at the interbank last week, many cannot say how that happened. But interventions from international oil companies (IOCs) cannot be ruled out.
Stakeholders’ speak
• Gwadabe
President, Association of Bureau De Change of Nigeria (ABCON), Alhaji Aminu Gwadabe, said some of the steps taken by the CBN has helped the market witness the absence of spurious demand and illegitimate transactions. He, however, said the market is currently witnessing adverse liquidity squeeze.
Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.
“While Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.
Head, Equities Market at FBN Capital Olubunmi Ashaolu said the CBN has by the policy, set clear cut objective on its monetary policy direction. He said the stock exchange positive reaction was an indication that local and foreign investors now understand where the naira is heading. “As long as there is clarity and good investment climate, the equities market will benefit,” he said.
He advised government to improve infrastructure, noting that such action would make Nigeria’s investment climate more attractive for foreign investors.
New measures
The CBN has reacted by fixing the rate at which banks can buy dollars from International Oil Companies (IOCs) at not more than N2 spread to its clearing rate, dealers said. The policy is the bank’s latest attempt to prop up the naira hit by the drop in oil prices.The CBN has pledged to stabilise the naira and has been deploying various measures. Dealers said the apex bank did not issue a formal circular on the directive, but instead resorted to persuasion, adding that the total outstanding dollar demand of about $600 million was not met.
Oil companies usually sell dollars through an auction to lenders to buy naira to fund their local operations.The CBN has also scrapped its bi-weekly currency auctions and a market body said it would sell dollars only at 197 naira, a move that amounts to a de facto devaluation of the currency.
This policy is part of what the CBN Governor, Godwin Emefiele, promised to stabilise the currency. He listed some of the challenges he is facing defending the naira, adding that the naira/dollar exchange rate has been under pressure over the last couple of months.
Explaining the difficulties in managing exchange rate stability, the CBN boss raised a poser: “What then can a Central Bank do to react to such a situation of falling reserves and pressurised exchange rates?
“One course of action would be to continue to deplete the foreign exchange reserves in trying to keep the official rate at a stable level. But there are several difficulties with this option.”
He said regardless of its critical nature in an import-dependent country such as Nigeria, the exchange rate operates like any other ‘price’ in the market.
The dollar/naira exchange rate is simply the ‘price’ of dollars in naira. The forces of demand and supply, he said, determine its movement. “When demand rises, the price rises. When supply falls, the price also rises as well. In recent times, Nigeria has faced a perfect storm of simultaneous dwindling supply of dollars and rise in demand. Both forces have led to a rise in the price of dollars, that is, significant reduction in supply of dollars to the market, even with constant output of crude oil production,” he said.
The other global factor, which has significantly reduced the supply of dollars in the market is related to the end of Quantitative Easing by the United States (U.S) Federal Reserve. At the height of the programme, the Federal Reserve was supplying a total of about $85 billion into the U.S economy on a monthly basis, through asset purchases. This programme came to an end in October last year, thereby significantly reducing the supply of US dollars in the global economy.
Another difficulty, which has contributed to the continuing depletion of Nigeria’s foreign reserves, and its capacity to defend the naira is that the combination of a fall in oil prices and the end of the Quantitative Easing programme by the US Federal Reserve have led to a depreciation of most currencies in the world against the dollar.
Previous steps taken by CBN
The CBN has directed that all importations involving electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions will henceforth be funded from the interbank foreign exchange market only.
In a circular to all authorised dealers, CBN Director, Trade & Exchange Department, O. I. Gbadamosi told stakeholders that the policy was to maintain the existing stability in forex market and strengthen the various policy measures, already initiated by the CBN.
On the development, Head, Africa Strategy at Standard Chartered in London, Samir Gadio, said: “The importation of electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions importations shall henceforth be limited to the interbank market only.
“We’re seeing more foreign-exchange flexibility. Perhaps they do not want to burn FX reserves unnecessarily. It’s a risky strategy though as the market will now look for the topside of dollar-naira and also because the lower rates will reduce the incentive to hold naira fixed-income assets.”
BDCs policy
Last June 23, the CBN, among others, raised the minimum capital requirement of BDCs to N35 million from N10 million. It raised the mandatory caution deposit to N35 million from $10,000.
Again, on July 7, the apex bank extended the deadline from July 15 to July 31, in response to appeals and intervention of Association of Bureau De Change Operators of Nigeria (ABCON)and both chambers of the National Assembly.
In a circular, CBN’s Director, Financial Policy and Regulation, Kelvin Amugo, said interest would be paid on the mandatory caution deposit of N35 million, based on the savings account rate. The CBN, Amugo said, would, on expiration of the deadline, cease to fund any BDC that failed to comply with the fresh requirements.
Naira crises complex
The misfortune of the naira seems complex. The thinking is that massive inflow of forex from surging oil prices and the boom in the capital market were responsible for the appreciation of the naira in the past few years. Unfortunately, oil prices have nosedived and Nigeria capital market is in a shambles. The fall in the price of oil has major consequences on government revenue, aggregate output, capital formation investment, employment, trade and fiscal balance.
The 2008 global financial meltdown also contributed to naira’s freefall. Chief Executive Officer, Financial Derivatives Bismarck Rewane, said Nigeria was unprepared for the shock. “The Nigerian economy believed to be one of the most resilient in the world was caught unawares by the global crisis,” he said.
Analysts said a gradual appreciation of the currency will require building confidence in the financial system and price of crude oil in international market. This is what is going to drive the exchange rate now and beyond. We cannot isolate what is happening in the global economy like the issue of diversification of energy sources.
Inflation statistics
National Bureau of Statistics (NBS) said the Nigeria’s Consumer Price Index (CPI), which measures inflation rate rose by 8.5 per cent yearly in March marginally higher than the 8.4 per cent recorded in February.
According to the latest CPI and inflation report from NBS, “This is the fourth consecutive month of a faster increase in the Headline index to reach the highest inflation rate recorded for the year. The Headline rate for March also equals last year’s high recorded in August.
NBS said while the pace of increase in food prices held firm for the second consecutive month, the faster increase in the Headline index was driven by increases in the non-food Classification of Individual Consumption by Purpose (COICOP) divisions which also reflected in the Core sub-index.
The report disclosed that food prices as observed by the food sub-index increased at relatively the same pace in March as in February; by 9.4 per cent.
“The pace of increases was weighted upon by a slower increase in the Bread and Cereals, Oils and Fats, Dairy and Confectionary groups. Faster increases were observed in all other groups which contribute to the Food sub-index,” NBS added.
NBS affirmed that monthly, food prices increased at a higher rate of 1.0 per cent, 30 basis points higher than the 0.7 per cent increase recorded in February.
The report further affirmed that the continued uptrend in the Headline inflation year-to-date mirrors their conservative float range of 9.5 per cent and 10 per cent for the 2015 fiscal year.
“Following the just concluded general elections which has reduced elevated political spending) and the CBN’s continued restrictive liquidity stance, we believe the biggest downside risk to inflation going forward is the pass-through consequence of a weaker naira.
“In addition, inflation might get heated by any action of the incoming government to pursue reforms that are expansionary in nature. We also note the inflationary consequence of a final removal of subsidy on petroleum, taking guidance from the recent press release by the president-elect, through a representative,” the report added.
South Africa has less flexibility on interest rates because the outlook for inflation has deteriorated, a deputy central bank governor said.
Daniel Mminele said several trends are stoking inflation, including this year’s increase in oil prices, a weakening in the rand and the likelihood the state power company will raise tariffs.
“Earlier this year we felt that short-term dynamics allowed for a pause on the interest rate normalisation path,” Mminele told a JPMorgan investor seminar on Sunday. “There is now reduced flexibility in this regard.”
As a result, the central bank’s monetary committee will have to “carefully assess when it will be appropriate to adjust the policy rate further.”
A copy of the speech was posted on the South African Reserve Bank’s website.
Already in late March, Governor Lesetja Kganyago ruled out cutting borrowing costs and said there was no more scope to pause “in the cycle of interest-rate normalisation.” The bank kept the benchmark interest rate unchanged at 5.75 per cent.
The central bank last month raised its inflation forecast for this year to an average 4.8 per cent from 3.8 per cent.
South Africa has been hit by a drought that has slashed its corn crop, the country’s biggest staple.
LAST month’s inflation rate is projected to moderate to 8.2 per cent, 0.16 per cent lower than the 8.4 per cent recorded in February, Managing Director, Financial Derivatives Company Limited, Bismark Rewane, has said.
In the FDC Economic Report released yesterday, he said the decline is surprising given the economic trends such as currency devaluation, a fiercely contested election and the commencement of the lean season.
In spite of these hitches, he said manufacturers, treasurers and the markets increased their inventories in anticipation of currency devaluation.
He said the impact of the decrease in money supply (M2) for January this year and the lower prices of international commodities relative to the same period last year are factors that weighed in favor of the price moderation.
He said there was speculative buying and fuel scarcity in March but had minimal impact on retail prices.
He said Lagos urban inflation index also declined to 10.26 per cent in March, 0.53 per cent from 10.79 per cent in February. The year-on-year food and non-food indexes decreased by 8.68 per cent and 11.06 per cent respectively, in March, from 9.99 per cent and 11.19 per cent in February. The decline, he added is in line with the projected headline inflation which is attributed to the sustained lower global commodities and consumer prices.
Rewane said headline inflation rate in April is expected to increase to 8.3 per cent due to the impact of currency devaluation and the intensity of the planting season. He said movement in sourcing of forex for raw materials from the Retail Dutch Auction System (RDAS) to the interbank market effectively increased their costs by 13 per cent. He said the Central Bank of Nigeria (CBN) has maintained a tight liquidity policy in April which has seen rates in the interbank market spike to 70 per cent per annum.
“Our March outlook for inflation is unlikely to influence the exchanges rates. However, the naira will continue to experience volatility at the interbank and parallel markets as foreign investors continue to speculate and sustain the demand pressure in these markets. “We estimate that the naira will trade within N197 to 199 to dollar at the interbank market against the dollar and may subsequently depreciate further should oil prices fall below $50 per barrel,” he said.
He said the equities market remained oblivious to inflation rate. “Intuitively, given that we expect no significant change in the money market, we anticipate stock market activities will be impervious. However, stock price decline in March was due to capital flight initiated by foreign investors as the elections drew near. The bearish position held by investors was also driven by reversal of capital flows by hedge funds and international investors,” he said.
Russia’s central bank lowered its key interest rate in line with most economist forecasts, as stabilising inflation clears the path to boosting an economy buckling under low oil prices and sanctions over Ukraine.
The one-week auction rate was cut by one percentage point to 14 per cent, the central bank said in a statement on its website Friday. Seventeen of 32 economists in a Bloomberg survey predicted the move, with nine seeing no change and five forecasting a bigger reduction. Another analyst predicted a half-point cut. Policy makers will hold a news conference later in the day.
The Bank of Russia is slowing the pace of decreases after a surprise 2 percentage-point cut at its previous meeting in January as oil prices slipped and inflation in February soared to the fastest since 2002. Even with price growth more than fourfold its mid-term target, the regulator is answering calls from business to unwind December’s emergency increase to 17 per cent to buoy an economy entering its first recession in six years.
“The current monetary policy and low economic activity will be conducive to the slowing of annual consumer price growth,” the central bank said in the statement. “As inflation risks abate, the Bank of Russia will be ready to continue cutting the key rate.”
Inflation has more than doubled from the start of last year following a 46 per cent drop in the ruble in 2014. The Russian currency traded 0.3 per cent weaker at 61.3520 to the dollar at 1:37 p.m. in Moscow.
The ruble’s collapse and Russia’s bans on food imports in retaliation for U.S. and European sanctions over the conflict in Ukraine helped stoke inflation in February to 16.7 per cent from a year earlier, compared with 15 per cent in January. Even so, it’s started slowing on a weekly basis. Price increases in the weeks ended March 2 and March 10 fell to four-month lows of 0.2 per cent.
Higher inflation readings are the result of past factors and the Bank of Russia estimates price growth will decelerate amid economic contraction and shrinking consumer demand, Governor Elvira Nabiullina said in an interview with Bloomberg Television. Price growth may peak at 17 per cent to 17.5 per cent, according to the Economy Ministry.
“There is no reason for the central bank to focus on current inflation, which will continue to accelerate for some time,” said Dmitry Polevoy, the chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, who correctly predicted a rate cut to to 14 per cent. “Its policy is traditionally based on inflation expectations.”
Pushing ahead with the rate-cut cycle will enable policy makers to focus more on jumpstarting the economy and pulling loan growth from four-year lows. Some banks in Russia have been blocked from global debt markets by sanctions that are hobbling consumer spending and choking investments.
Gross domestic product contracted 1.5 per cent in January from a year earlier, according to a preliminary estimate by the Economy Ministry. GDP may shrink 3 per cent this year after 0.6 per cent growth in 2014, according to the government’s official forecast.
“While inflation is yet to peak, the unexpected 200 basis- point cut in January indicated that the central bank is determined to ease the burden on the economy as soon as possible to reduce the risk of severe recession,” said Piotr Matys, a London-based foreign-exchange strategist at Rabobank International who correctly predicted the 100 basis-point rate cut.
United States producer prices fell in February for a fourth straight month, pointing to tame inflation that could argue against an anticipated June interest rate hike from the Federal Reserve.
Other data showed a decline in consumer sentiment in early March, as harsh winter weather left households with high utility bills and disrupted shopping and general business activity.
The Labour Department said its producer price index for final demand declined 0.5 percent as profit margins in the services sector, especially gasoline stations, were squeezed, and transportation and warehousing costs fell.
The PPI had dropped 0.8 percent in January. In the 12 months through February, producer prices fell 0.6 percent, the first decline since the series was revamped in 2009.
“The underlying message appears to be that pipeline inflationary pressures remain quite weak, even as energy prices have stabilised and gasoline prices have drifted modestly higher,” said Millan Mulraine, deputy chief economist at TD Securities in New York.
Economists had forecast the PPI rising 0.3 percent last month and remaining unchanged from a year ago.
In a separate report, the University of Michigan said its consumer sentiment index fell to 91.2 in early March from a reading of 95.4 in February. But with bad weather mostly blamed for the ebb in sentiment, a rebound is seen as likely.
U.S. Treasury prices were mixed, while the dollar rose against a basket of currencies. U.S. stocks fell, putting the S&P 500 index on track for its third straight weekly decline.
The inflation data came ahead of next week’s Fed meeting, where policymakers are widely expected to signal the U.S. central bank’s openness to a June rate hike by dropping a pledge to be “patient” in considering such a move.
But with price pressures remaining muted and retail sales extending their decline in February, some economists believe the central bank could hold off on raising rates until at least September. Inflation is running well below the Fed’s 2 percent target.
“The Fed will need to see some firming in core and pipeline inflation before achieving lift-off to assure that the 2 percent target on inflation is indeed within reach,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.
The Fed has kept its key short-term interest rate near zero since December 2008.
Services accounted for 70 percent of the decline in the PPI last month. The volatile trade services component, which mostly reflects profit margins, fell a record 1.5 percent in February, after rising 0.5 percent in January.
Has the Central Bank of Nigeria (CBN) lost the battle for exchange rate stability? This is the question many are asking as the naira continues to fall, despite the CBN’s efforts to stabilise it. Although it closed at N197.8 to the dollar at the interbank last week, it still exchanges at N220 at the parallel market, making nonsense of the benefits of the CBN interventions, writes COLLINS NWEZE.
Ahead of this month’s elections, increased political risk, falling oil prices and lack of interest in investors’ frontier assets have put the naira under pressure.
At its weakest, the naira was quoted at a record low of N206.60 to the dollar last month, a decline of 20 per cent since November. The naira also dropped to N220 at the parallel market before the CBN closed the Retail Dutch Auction System (RDAS) last month.
This has depleted foreign reserves and shot inflation up to 8.2 per cent in January. The foreign exchange reserves fell 9.04 per cent to $30.87 billion by March 4, from $33.94 billion a month earlier. The CBN has used the reserves to support the ailing naira, which has been hammered by falling global oil prices and uncertainty over the delayed presidential elections due later this month.
Although the currency was able to stabilise at N197.8 to dollar at the interbank last week, many insist that it has indeed fallen from the Olympic heights. The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms.
Although it was unclear what stabilised the naira, interventions from International Oil Companies (IOCs) cannot be ruled out.
But the local currency suffered its biggest monthly fall in over five years last month, dealers said, citing concerns over political uncertainty and the CBN’s ability to manage a currency hammered by weak oil prices.
The naira shed 8.3 per cent to the dollar in February, which dealers said was worse than the 6.9 per cent fall in November after the CBN devalued the currency by eight per cent to save the foreign reserves.
New measures
Last week, CBN fixed the rate at which banks can buy dollars from International Oil Companies (IOCs) at not more than N2 spread to its clearing rate, dealers said. The policy is the bank’s latest attempt to prop up the naira hit by the drop in oil prices.
The naira crashed through the psychologically important level of N200 to the dollar last month in a rout triggered by weak oil prices and escalating tension over the postponement of a presidential election.
The CBN has pledged to stabilise the naira and has been deploying various measures. Dealers said the central bank did not issue a formal circular on the directive, but instead resorted to persuasion, adding that the total outstanding dollar demand of about $600 million was not met.
Oil companies usually sell dollars through an auction to lenders to buy naira to fund their local operations. The naira closed at N197 to the dollar on Thursday, firmer than N199.9 its ended on Wednesday. Dealers said the bank had beefed up inspection of commercial bank’s trading books to verify utilisation of its dollar sales.
The CBN scrapped its bi-weekly currency auctions last month and a market body said it would sell dollars only at 198 naira, a move that amounts to a de facto devaluation of the currency of Africa’s biggest economy.
This policy, is part of the CBN Governor Godwin Emefiele promised to stabilise the currency. He listed some of the challenges he is facing defending the naira, adding that the naira/dollar exchange rate has been under pressure over the last couple of months.
Explaining the difficulties in managing exchange rate stability, the CBN boss raised a poser: “What then can a Central Bank do to react to such a situation of falling reserves and pressurised exchange rates?
“One course of action would be to continue to deplete the foreign exchange reserves in trying to keep the official rate at a stable level. But there are several difficulties with this option.”
He said regardless of its critical nature in an import-dependent country such as Nigeria, the exchange rate operates like any other ‘price’ in the market.
The dollar/naira exchange rate is simply the ‘price’ of dollars in naira. The forces of demand and supply, he said, determine its movement. “When demand rises, the price rises. When supply falls, the price also rises as well. In recent times, Nigeria has faced a perfect storm of simultaneous dwindling supply of dollars and rise in demand. Both forces have led to a rise in the price of dollars, that is, significant reduction in supply of dollars to the market, even with constant output of crude oil production,” he said.
The other global factor, which has significantly reduced the supply of dollars in the market is related to the end of Quantitative Easing by the United States (U.S) Federal Reserve. At the height of the programme, the Federal Reserve was supplying a total of about $85 billion into the U.S economy on a monthly basis, through asset purchases. This programme came to an end in October last year, thereby significantly reducing the supply of U.S dollars in the global economy.
Another difficulty which has contributed to the continuing depletion of Nigeria’s foreign reserves, and its capacity to defend the naira is that the combination of a fall in oil prices and the end of the Quantitative Easing programme by the US Federal Reserve have led to a depreciation of most currencies in the world against the dollar.
Previous steps taken by CBN
The CBN has directed that all importations involving electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions will henceforth be funded from the interbank foreign exchange market only.
In a circular to all authorised dealers, CBN Director, Trade & Exchange Department, O. I. Gbadamosi told stakeholders that the policy was to maintain the existing stability in forex market and strengthen the various policy measures, already initiated by the CBN.
On the development, Head, Africa Strategy at Standard Chartered in London, Samir Gadio, said: “The importation of electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions importations shall henceforth be limited to the interbank market only.
“We’re seeing more foreign-exchange flexibility. Perhaps they do not want to burn FX reserves unnecessarily. It’s a risky strategy though as the market will now look for the topside of dollar-naira and also because the lower rates will reduce the incentive to hold naira fixed-income assets.”
BDCs policy
Last June 23, the CBN, among others, raised the minimum capital requirement of BDCs to N35 million from N10 million. It raised the mandatory caution deposit to N35 million from $10,000.
Again, on July 7, the apex bank extended the deadline from July 15 to July 31, in response to appeals and intervention of Association of Bureau De Change Operators of Nigeria (ABCON)and both chambers of the National Assembly.
In a circular, CBN’s Director, Financial Policy and Regulation, Kelvin Amugo, said interest would be paid on the mandatory caution deposit of N35 million, based on the savings account rate. The CBN, Amugo said, would, on expiration of the deadline, cease to fund any BDC that failed to comply with the fresh requirements.
Naira crises complex
The misfortune of the naira seems complex. The thinking is that massive inflow of forex from surging oil prices and the boom in the capital market were responsible for the appreciation of the naira in the past few years. Unfortunately, oil prices have nosedived and Nigeria capital market is in a shambles. The fall in the price of oil has major consequences on government revenue, aggregate output, capital formation investment, employment, trade and fiscal balance.
The 2008 global financial meltdown also contributed to naira’s freefall. Chief Executive Officer, Financial Derivatives Bismarck Rewane, said Nigeria was unprepared for the shock. “The Nigerian economy believed to be one of the most resilient in the world was caught unawares by the global crisis,” he said.
Analysts said a gradual appreciation of the currency will require building confidence in the financial system and price of crude oil in international market. This is what is going to drive the exchange rate now and beyond. We cannot isolate what is happening in the global economy like the issue of diversification of energy sources.
Policy makers speak
Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.
The official devaluation of the naira, she said, allows the Retail Dutch Auction System (RDAS) to move within the range that straddles the interbank foreign exchange rate. “While the market reaction to the RDAS move in the near-term will be important, we think that these measures deal as comprehensively as possible with the challenges facing Nigeria.
“While Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.
Head, Equities Market at FBN Capital Olubunmi Ashaolu said the CBN has by the policy, set clear cut objective on its monetary policy direction. He said the stock exchange positive reaction was an indication that local and foreign investors now understand where the naira is heading. “As long as there is clarity and good investment climate, the equities market will benefit,” he said.
He advised government to improve infrastructure, noting that such action would make Nigeria’s investment climate more attractive for foreign investors.
