According to a Bloomberg Africa article today (Wednesday), CBN’s Deputy Governor, Dr Joseph Okwu Nnanna, advocated that he was not scared of foreign investors fleeing the Nigerian economy indicating that the Central Bank of Nigeria was ready to defend the naira.
The CBN’s Deputy Governor said “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.”
He made this remark at a conference in the resort city of Sharm El-Sheikh in Egypt. Nnanna also gave inkling as to when and why the CBN would 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 MPR is determined by the CBN Monetary Policy Committee from time to time. 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.
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 increase the rates even though inflation rate is going lower. We strongly believe, keeping the reserves strong and exchange rate stable is rather important to the CBN of today.