MPC Tightens to 14% P.A; Between a Rock and a Hard Place - FDC


Thursday, July 28, 2016 8:45am/fdc

Rate hike a tactical response to:

·         Curb the persistent rise in Headline Inflation to 16.5%

·         Increase dollar inflow into the forex market

·         Reduce external reserve depletion

·         Increase national savings

·         Reduce regulatory arbitrage between banks and the CBN


Benefits of move

·         Will lead to short term naira appreciation

·         Naira already in the REER, 20 year fair value N315 – N320

·         Naira appreciated to N376/$ from N378/$

·         Reduce demand for dollars at the interbank

·         Reduce cost of imported raw materials and finished goods


Inflation in Nigeria (Supply Shocks)


·         Inflation resulting from supply shocks

·         May not respond to interest rate hikes

·         Rate hikes good for money supply induced inflation


Disadvantages – Limited policy options and hard choices

·         Higher cost of borrowing a peril to SME’s

·         Increase corporate failure and bankruptcies

·         Higher non-performing loans (NPL) 11% – 15%

·         A spike in government debt service approx. N1trn

·         No matter the decision, more pain before gain

Sub-Saharan Africa Perspective


·         Naira will appreciate and stabilize in the interbank to N300/$ - N305/$

·         BDC rates will appreciate to N370/$

·         Gains will depend on oil production

·         Market transparency and liquidity

·         Tactical moves do not solve structural problems

·         Only consistency, time and patience will do

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