The exchange rate between the Naira and the dollar closed at about N424/$1 at the black market on Friday the 16th of September 2016. The rate had remained stubbornly above N400 since the CBN banned about 9 banks from the FX market, following the controversy surrounding TSA remittances. As at August 23, when it took that decision, the exchange rate was trading at about N396/$1.
If you probably noticed that we referenced the black market, well it is because that is the only reliable market out there.
As we enter another tumultuous week in the life of our dear economy, analysts are once again concerned about what could be the faith of the Naira. There is one major reason why the market is a bit nervous.
Rate Hike – The Monetary Policy Committee of the Central Bank is meeting this on Monday and Tuesday the 19th and 20th of September 2016 to vote on whether to increase its monetary policy rates (MPR). The MPR is probably the most tracked rate of the CBN as it is a benchmark for where interest rates could be pointing to in the next few weeks. Back in July, the last time the MPC met, they decided to raise rates by 2% to 14%, the highest rate increase in recent history.
This decision raised lending rates across board and is thought to have contribute negatively to economic growth. In taking this decision, the CBN had one thing in mind. Attract foreign investors!! The CBN believed that hiking rates will attract foreign portfolio investors into Nigeria bringing in the ‘badly’ needed dollars required to stave off a further depreciation of the Naira. The decision was hotly debated by members of the committee and resulted in a split vote.
The meeting this week is not expected to be contentious considering that inflation rate increased to 17.6%. Most analysts believe that rates will be kept at 14%, since month on month inflation rate has actually moderated and the last rate hike didn’t actually yield desired results.
Some analysts however believe that whatever decision the CBN takes at the MPC will have little effect on the direction of the naira at least in the short term. They believe that, foreign investors are more circumspect about the economy as the core fundamentals weaknesses of the economy are yet to be addressed. They also point to the wide disparity between the official rates and the black market rates as another indication that the naira is still overvalued at the official interbank market. With oil prices projected to remain below $50 oil revenue continues to remain an unreliable factor in any major short term turnaround of the economy.
Last week, just before S&P downgraded Nigeria, the Government announced that it had obtain approval to borrow about $1 billion in Eurobonds, a decision analysts believe may not provide a significant impact on alleviating the currency crisis.
Nairametrics believes the exchange rate will remain between the N424 and N430 bands this week pending no calamitous decision from the CBN.