Nigeria’s Central Bank opts for ‘flexible forex policy’ without details

24 May 2016
Financial Nigeria


The Central Bank of Nigeria retained benchmark interest rate at 12 percent.

Governor, Central Bank of Nigeria, Godwin Emefiele

The Central Bank of Nigeria has retained benchmark interest rate at 12 percent, Godwin Emefiele, Governor of the CBN, told reporters on Tuesday after a two-day Monetary Policy Committee (MPC) meeting.

Emefiele also said that the CBN plans to adopt a flexible foreign exchange regime while retaining a window for critical transactions. The CBN also retained the Cash Reserve Ratio (CRR) at 22.5 percent and the Liquidity Ratio at 30 percent.

"The MPC voted unanimously to adopt a flexible exchange rate policy to restore the automatic adjustment properties of the exchange rate . . . detailed operations of the new structure will be announced in due course," Emefiele said.

Last week, the National Bureau of Statistics (NBS) reported that Nigeria’s economy contracted by 0.36 percent in the first quarter of 2016. More so, Nigeria’s inflation rose to 13.7 percent year-on-year in April from 12.8 percent year-on-year recorded in March.

“The Committee noted that the action taken at this meeting is predicated on a less optimistic outlook for the economy, given that initial monetary injections from the budget may not immediately impact on the economy,” said Emefiele.

Analysts have welcomed the CBN’s decision to introduce flexibility to the forex market as this could set the stage for foreign investors to return to the Nigerian market.

“If the CBN allows the market to set the flexible currency rate, and lets exporters sell their dollars into the interbank market – then the market can find the right level for the naira,” Charles Robertson, Renaissance Capital’s Chief Economist, told Financial Nigeria.

“The BDC rate will become less relevant. When supply and demand find the right price for the naira, investors will renew their interest in Nigeria. I would expect the economy to bounce back in 2017.”

Robertson also said that the CBN should peg the interbank rate in order to avoid setting a rate that is too weak or too strong.

“This could end up with Nigeria having three different exchange rates, the 199/$ “critical” rate, the interbank rate and the BDC rate.  This is unlikely to be as good for Nigeria in the long-run,” said Robertson.

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