According to a Bloomberg Africa article on Wednesday, CBN’s Deputy Governor, Dr Joseph Nnanna, suggested that he was not afraid of foreign investors fleeing the economy indicating that the CBN was ready to defend the naira.
“I am not worried about reversal of capital flows…..“If any investor wants to exit the market, we shall meet them at the door and write a check and give them their money.” Joseph Nnana
He made this comment on the sidelines of the of a conference in the resort city of Sharm El-Sheikh in Egypt. The CBN Governor also gave insight into when and why the CBN will be willing to raise the Monetary Policy Rate (MPR) which has stayed at 14% since 2016. According to him, the decision on whether the MPR will be increased or reduced will depend on the inflation rate.
The Monetary Policy Rate (MPR) is determined by the CBN Monetary Policy Committee periodically. The rate is the official benchmark rate of the CBN and the rate at which it lends money to commercial banks.
CBN on July 24, 2018, held its benchmark interest rate at 14% and Nnana explains the decision on rate direction will depend on the direction of inflation. According to him, “Our intention is to ensure that the interest rate is kept positive in real terms.
The CBN Deputy Governor who incidentally pushed for a rate increase in his vote last July also revealed that the CBN was “in the mood” to increase rate as the 2019 election approaches.
Why this matters
- The CBN has kept MPR at 14% for over two years as part of its two-pronged strategy of keeping the exchange rate stable and making FGN debts attractive to foreign investors.
- A high MPR indicates the CBN’s policy is geared toward keeping interest rates high which often lures foreign investors to holding the naira rather than the dollar.
- A higher interest rate on the naira versus the dollar is an economic way of keeping the naira competitive against a stronger dollar.
- Nigeria’s external reserve has dropped below $47 billion for the first time since April so it is probable that the CBN knows that foreign investors have started exiting signaling their discontent at the lowering treasury bills yield.
- However, the CBN might seem compelled to raise rates even though inflation rate is trending lower. We believe, keeping the reserves strong and exchange rate stability is more important to this CBN.