Abuja - Analysts projected the success of measures implemented by the Central Bank of Nigeria to safeguard the value of the Naira.
Safeguarding the value of the currency and the country’s external reserves were at the forefront of the Monetary Policy Committee’s considerations at its November gathering on Tuesday, when it devalued the Naira.
“Given the changing face of the global oil market and the prospect of policy normalisation by the Fed in 2015, the CBN carried out bold actions to address imbalances in the foreign exchange market,” said an analyst.
His sentiments came after the committee undertook to tighten monetary conditions by utilising instruments it believed to be most potent in addressing excess liquidity in the banking system.
A 100bp increase in the MPR with a 500bp escalation in the cash reserve requirement (CRR) on private sector deposits was expected to bring about orderly behaviour among banks and ensure that funds are deployed to more productive sectors.
Analysts had pencilled in a 250bp increase in the CRR on public sector deposits but the ratio was retained at 75 percent.
Of greater significance is the 8,4 percent upward adjustment to the official mid-point rate (from USD/NGN155 to 168) and a widening of the band around the mid-rate from 3 percent to 5 percent, which underscores the CBN’s commitment to foreign exchange stability in the face of external challenges, according to Rand Merchant Bank.
Also read: CBN devalues currency
“Notwithstanding the positive effect of the lower oil price on fuel costs, a weaker naira will have a more pronounced impact on headline inflation due to Nigeria’s reliance on imports of raw materials, refined products and consumer goods. While the 12-month change in core inflation remains sticky at 7,1 percent, it is at risk of becoming unhinged owing to second-round effects, necessitating tighter monetary policy,” RMB stated.
“Taken together, the CBN’s measures should reduce pressure on the naira and slow the depletion of foreign exchange reserves. The unsettling prospect for Nigeria is that irrespective of the monetary policy response, the economy will be subject to painful adjustments, reinforcing the need to diversify the country’s export base and fiscal revenues. The naira will serve as an automatic stabiliser to combat the loss of productivity resulting from the adverse terms of trade shock.”
Before the CBN measures, the Naira had been trading at 180 to the United States dollar, despite the official band of 150-160 Naira.
- CAJ News