Deposit Money Banks will need to begin aggressive moves to retain private sector customers following the recent increase in Cash Reserve Requirement of private sector deposits by the Central Bank of Nigeria’s Monetary Policy Committee.
The MPC had last week increased the CRR on private sector deposits to 15 per cent, up from 12 per cent.
Economic and financial analysts said the decision might lead to a slight increase in interest rate as banks begin moves to retain existing private sector deposits and also attract new deposits.
The Head, Investment Research, Afrinvest, Mr. Ayodeji Ebo, said, “We expect slight increased competition for private sector deposits which may lure banks to increase interest rate to preserve existing deposits and attract new deposits.”
The analyst said the MPC decision was in line with Afrinvest’s expectation as it had expected the CBN to uphold its ‘hawkish’ policy stance.
He, however, said the firm thought the benchmark interest rate (Monetary Policy Rate) would also be raised to calm foreign capital reversals as observed in other emerging markets.
He said such move would have eased the current pressure on the naira.
Ebo said, “As a result of the persistent capital flow reversals, the up-coming 2015 elections and the non-adjustment of the MPR in Nigeria to favour FPIs, we expect the naira to remain under pressure in the near term.
“Given the significant decline in the external reserves in 2014, the CBN might call for an emergency meeting before its May 2014 the MPC meeting if the reserve depletes below $35bn before May. This may necessitate the CBN to adjust the exchange rate band in the interim not minding its impact in form of imported inflation.
However, the CBN has insisted there is no plan to devalue the naira any time soon. The CBN Governor-Designate, Mr. Godwin Emefiele, has also said devaluation is dangerous for the country.
The Head, Intelligence and Research, BGL Plc, Mr. Femi Ademola, said it agreed with the MPC decision, although it was not as much as his firm had expected.
He said, “The MPC has information on the cause of the increased pressure on the naira exchange rate. The implications of the decisions may imply that; the tapering of the United States Quantitative Easing has been around for some time; hence it is expected that the market has reacted to it already and so no further reaction is expected in that regard.
“Also, the expected policy changes revolve around the increase in interest rate in most advanced economies especially in the US. However, this is not expected until the middle of 2015 when the Fed is expected to have completely halted it bond purchase programme, so we have some time to adjust.”
According to the MPC, shortfall in oil revenue is expected to be reversed with possibility of a significant accretion to foreign reserves based on the expectation of higher oil prices from the developments in Russia and Ukraine.
The BGL official said election spending posed significant threat to inflationary outlook but the projection of a strong agricultural harvest would douse the effect to a modest outlook.
This, he said, was part of the reason the MPC might have taken the decision to continue with monetary tightening.
Ademola recalled that most portfolio managers and currency traders had expected an adjustment to the midpoint of the naira exchange rate.
Part of their argument, according to him, is that the United States tapering has made emerging market and developing markets’ currencies to suffer depreciation as capital reverses back to the developed economies.
“The currencies of Brazil, Russia, India, China and South Africa depreciated by an average of 5.25 per cent since June 2013 to March 2014. However, the naira remained stable at N155.25/$ within the period,” he noted.
Consequently, the analyst said the naira might experience speculative attack in the next few weeks.
Copyright PUNCH.
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