The much awaited Monetary Policy Committee, MPC meeting has come and gone. The decision is a fight against inflation and another tougher times for the financial markets as CBN hikes MPR from 12% to 14%.
Before now, various analysts had predicted a cut in interest rates to increase lending and stimulate Nigeria’s recessing economy. However, the committee said:
“The Committee noted that inflation had risen significantly, eroding real purchasing power of fixed income earners and dragging growth. The MPC was further concerned that while the situation called for obvious tightening of the monetary policy stance, the technical recession confronting the economy and the prospects of negative growth to year-end needed to be factored into the policy parameters”
“Consequently, all 9 members voted to hold and introduce greater flexibility in managing the foreign exchange rate. The Bank would however, retain a small window for funding critical transactions. Details of operation of the market would be released by the Bank at an appropriate time.”
In summary, the MPC said “noted that the negative real interest rates did not support the recent flexible foreign-exchange market as foreign investors’ attitude had remained lukewarm, showing unwillingness in bringing in new capital,” and that “An increase in borrowing costs“gives impetus for improving the liquidity of the foreign-exchange market,”
While this would curb Nigeria’s surging inflation, businesses would not be willing to borrow unless the CBN provides special lending window for perhaps essential manufacturers. Last week, Nigeria Bureau of Statistics, NBS said headline index increased by 16.5% (year-on-year), 0.9% points higher from rates recorded in May (15.6%).
It will also be interesting to see what the ‘greater flexibility’ in the inter-bank foreign exchange market will do to increase USD liquidity in the market.
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