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CBN meets amid chances of further Naira devaluation

20 January 2015, 08:56Okoro Chinedu

Lagos - The Central Bank of Nigeria is in an uncertain position ahead of decisions, including further currency devaluation, its Monetary Policy Committee is set to make later on Tuesday.

This follows its measures to stabilize the local currency or suppress demand for the United States greenback largely failing, analysts said.

“The CBN is in a precarious position as most of the measures it enacted over 4Q14 have failed to quell US dollar demand. The precipitous fall in the oil price has exacerbated underlying structural weaknesses, resulting in consistent currency losses,” said Rand Merchant Bank (RMB), the economic think tank ahead of the CBN MPC meeting.

“The pass through to the real economy is likely to dislodge inflation expectations and undermine economic confidence, threatening the CBN’s ability to safeguard price stability. While prevailing conditions demand tighter monetary policy, we continue to believe that raising the MPR would be ineffective due to the asymmetries in the domestic money market.”

Also Read: Banks prevented from holding funds in dollars

RMB said the CBN was then faced with the challenge of having to adopt unconventional measures to affect liquidity conditions.

“A further currency devaluation might be in the offing given persistent weakness and the sharp decline in daily trading volumes. However, the timing of such a move remains uncertain especially as the presidential elections draws near,” the firm added.

It said 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.

“We cannot rule out a more sizeable adjustment to the nominal exchange rate (to above USD/NGN200) or further rate hikes with the oil price at its current low level. As fiscal policy is unlikely to be significantly restrained, monetary policy may have to be more of a disciplining factor to assist rebalancing.”

- CAJ News

Tags cbn naira

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