More pressure on Naira ahead possible interest rate hike

Financial experts have said there are concerns that the Central Bank of Nigeria (CBN) low net FX reserves and the defense of the naira sparked risk-off sentiments amongst foreign investors and limited inflows from Foreign Portfolio Investors (FPIs).

Analysts at Cordros Security raised the point in its pre MPC notes ahead of the third meeting of the year on the 20th and 21st of May.

FX inflows into the NAFEM market fell by 48.1% to USD1.95 billion in April (March: $ 3.75 billion), with inflows from foreign sources particularly led by FPIs declining by 68.9% to USD478.10 million (March: $1.54billion).

Financial Analyst, Esther Mayowa in her submission said: “We note that despite weak inflows from FPIs, the CBN’s intervention in various market segments has remained frail and irregular, given its weak net FX reserves.

“Total inflows from the CBN into the NAFEM market declined by 35.1% to USD 98.00 million (March: USD151.00 million). Additionally, whilst the CBN maintained dollar sales to BDCs and commercial banks, the total sum of FX supplied remained insufficient to alleviate the pressure in the FX market.

“Consequently, the naira weakened to a low of NGN1,533.99/USD in the NAFEM market on 16 May, coming from a high of NGN1,072.74/USD on 17 April. Elsewhere, the naira fell by 34.0% to NGN1,515.00/USD as of 16 May from a low of NGN1,000.00 as of 16 April.”

The Experts want the MPC to note the depreciation of the naira in the FX market and attribute this to the renewed demand pressure from capital outflows induced by external shock.

Moya said: “We expect the MPC to encourage the CBN to sustain its FX supply to the market to stabilize the naira while maintaining reforms to ensure reduced speculation activities and market confidence.

MPC to Raise the Monetary Policy Rate by 100bps

According to Cordros Research estimates, Despite the moderation in price increases evidenced in the decline in month-on-month inflation numbers for April, the analyst anticipates a further tightening of the monetary policy rate.

Mayowa said; “This is because (1) a one-month data release of a slowdown in prices is not sufficient for the MPC to conclude that inflation is under control, (2) inflation risks are skewed to the upside given that currency pressures have resurfaced, (3) the need to manage inflation expectations given the inflationary impact of the anticipated review of the minimum wage.

“Nevertheless, we anticipate a less hawkish stance primarily due to (1) the slowdown in the pace of inflation and (2) DMO’s reluctance to take interest rates significantly higher in the fixed-income market, given its impact on the Federal Government’s debt burden.

“Accordingly, we anticipate the MPC to raise the MPR by 100 basis points to 25.75% while holding other parameters constant.”.

Naira grapple with price discovery

The naira appreciated by N90 on the parallel segment of the foreign exchange (FX) market last Friday as it closed at N1,450/$1, compared to the previous day’s rate of N1,540/$1.

The positive trend extended to the official Nigerian Autonomous Foreign Exchange Market (NAFEX) window, where the naira appreciated by N36.66, closing at N1,497.33/$1 compared to the N1,533.99/$1 which it closed on Thursday.

The data represents a 2.1% depreciation week to date. It was, however, a 2.5% gain from the N1,593.9 recorded a day earlier, which was the weakest since March 20 this year.

Daily turnover for the week also rose from $608.5 million to $991.9 million, representing a 63% increase week on week.