Nigeria must boost FX reserves before cutting rates, says CBN official
The Central Bank of Nigeria (CBN) needs to increase its foreign exchange reserves before conditions would be suitable for a rate cut, and a cut is unlikely before presidential elections next year, one of the bank’s deputy governors, Kingsley Moghalu, said on Wednesday.
The CBN on Tuesday kept rates unchanged at 12 percent, a level unchanged for the last two years.
A cut is seen as likely to make international investors withdraw funds – high-yielding Nigeria has been a frontier market favourite – potentially putting pressure on the naira.
“We have to build up our reserves quite a lot and that’s happening right now,” Moghalu told Reuters in an interview in London, in answer to a question as to when conditions would be right for a rate cut
Governor Godwin Emefiele, leading the first Monetary Policy Committee (MPC) meeting since he was sworn in last month, said on Tuesday he favoured a gradual reduction in interest rates over the next five years.
Nigeria’s foreign exchange reserves have fallen 18 percent year-on-year, although they climbed 3.8 percent in July, to $38.49 billion, data this week showed.
The central bank has a target trading band for the naira of 150-160 per dollar, though the currency has been trading at slightly weaker levels in recent months.
Some analysts say a level of 180-190 per dollar would be more appropriate.
“Our policy stance is that devaluation of the naira is not on the cards,” Moghalu said. “Does it mean we will defend the naira at all costs? Not likely.”
Investors have grown more nervous after the suspension of former central bank governor Lamido Sanusi in February, and ahead of presidential elections in February 2015.
“It’s unlikely that the rate cuts will happen before elections early next year,” Moghalu said.
“Right now there is lot of politicking in the air with increasing spending, but after the elections, when things are calm, then we will take a look at the landscape and see if the conditions are right.”
Emefiele on Tuesday flagged “underlying inflationary pressure” as one reason to be cautious about cutting rates.
Consumer inflation in Africa’s largest economy rose for the fourth straight month in June to hit 8.2 percent, a 10-month high – within the bank’s target of between 6 and 9 percent, but trending upwards due to higher food prices.
“We are concerned (about inflation) but are not alarmed or panicked,” Moghalu said.
He also said in a discussion in the Reuters Global Markets Forum, an online financial community, that Nigerian monetary policy would need to take account of potential risks from the end of the United States’ bond-buying programme, which had fuelled demand for higher-yielding assets.
“We are keeping an eye on tapering,” he said.
“This is one of the reasons why we think it is so important to build up fiscal buffers and our reserves.”
Moghalu is in charge of the Operations Directorate and supervises the following departments – Banking and Payments Systems, Currency Operations, Branch Operations, Reserve Management and Information Technology.