CBN meets amid chances of further Naira devaluation

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.” RMB said the CBN was then faced with the challenge of
having to adopt unconventional measures to affect liquidity
conditions. [image] “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.”