Nigeria’s Central Bank, with its decision to maintain all monetary policy instruments yet again, is beginning to reveal an obsession for maintaining a strong Naira, Bismarck Rewane, a finance analyst and Managing Director, Financial Derivative Company, has said.
Mr. Rewane said among the factors that might have influenced the MPC’s Decision Framework is that the Central Bank has adopted a monetary policy framework of implicit inflation targeting, with the interest rate as its nominal anchor, adding that it has also implemented its strategy using the discretionary rule.
“Even though it talks of inflation targeting, the Central Bank’s body language reveals a near obsession with maintaining a strong Naira, with a tendency towards overvaluation.
“This means the Central Bank is proactive and is more aggressive in the execution of its strategy of maintaining price stability” he said.
According to him, one can suggest that the information before the committee on such factors like anticipated inflation must have been ‘overwhelming’ to shift the ‘doves and hawks’ in the same direction.
The Naira has traded in the official market between N150/$ and 155.72/$ in the last 18 months.
“The Central Bank, through its comments has alluded to the fact that it believes, the exchange rate is a major factor in the consumer inflation equation” he said, adding that with Nigeria’s marginal propensity to import, any movement in the exchange rate is pivotal to the general price level and by implication, its index.
“The reality is that a strong Naira policy is symptomatic of a Dutch disease syndrome. It ties the hands of the Central Bank and limits its options in the use of interest rates and other money market instruments. The reality that the monetary policy strategy is not a zero-sum game, that is, it is not either the exchange rate or the MPR, but any combination of both,” he said.
‘Analysts are bored’
The monetary policy committee behaved true to type and left the benchmark interest rate un- changed (MPR) at 12 per cent per annum after the first meeting of 2013.
All other instruments for complementing monetary policy were untouched as essentially, the MPC maintained the status quo.
“The consensus among analysts was for the rate to be left unchanged and the stance of the Central Bank to remain contractionary till the next meeting in March 2013,” Mr. Rewane said.
According to him, “that is why the markets are unlikely to gyrate after this meeting and analysts are at best bored.”
Mr. Rewane said Nigeria has joined Angola in maintaining its benchmark interest rate for over 12 months compared to its peers- Kenya, Uganda and South Africa- who have cut their rates.
FDC’s analysis suggests that Nigeria has the lowest inflation gap among the listed countries. It suggests that inflation is expected to trend downwards which implies that there is room for expansionary monetary policy.
There is a correlation between the size of the inflation gap and the policy stance of the Central Bank. The lower the inflation gap, the more accommodating the Central Bank will be.
“We anticipate a decline in inflation to a single digit figure of 9.29 per cent in first quarter of 2013 (Q1’13). The high base effect in January 2012 after the increase in pump price, will have a downward effect on the price level,” Mr. Rewane said.
The committee on Monday, voted 8-2 to retain the status quo as against the voting pattern in the past 6 months, which has been more unanimous than dissenting.
The last time there were dissenting views or minority votes was in July, 2012.
The decision was to leave MPR unchanged at 12 per cent per annum with an asymmetric corridor of +/- 200 basis points (bps) around the mid-point.
Cash Reserve Ratio was left unchanged at 12 per cent of total assets while Net Open position limit was also retained at 1 per cent of shareholders’ funds.
Lamido Sanusi, the Central Bank Governor, said the Committee considered the calls for a reduction in the MPR because of the benign inflation outlook, other things being equal.
“The Committee decided that it was prudent to hold and monitor developments between now and the next meeting of the MPC. The Committee, therefore, decided by a majority vote of 8:2 to maintain the current policy stance,” he said, in a communique made available by the regulatory body.
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