FOR the very fact that traditional monetary policy tools at the moment have become dampened having reached their limits in stimulating investor confidence, hiking interest rate would not buoy foreign investor confidence in returning to the Nigerian market.
At the same time cutting interest rate at this time may not necessarily spur real sector lending by Deposit Money Banks (DMBs) but generate appetite for government securities and speculative foreign exchange (FX) positions.
This was the conclusion of a herd of financial experts as they dig deeper into fresh rationale behind the decision to maintain status quo on current interest rate environment by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria.
According to Robert Omotunde-led analysts at an investment banking and securities group, Afrinvest, the holdback in the return of foreign capital is largely tied to the lingering currency risk and perceived misgivings regarding the credibility and transparency of the current FX market structure.
Earlier in his speech at the 2016 annual bankers’ dinner, titled “Policy Options for Reversing Nigeria’s Economic Downturn”, CBN Governor, Mr Godwin Emefiele hinted that with inflation at over 18 percent; the CBN would be abjectly failing on one of its cardinal objectives if it cuts interest rates at this time. According to Emefiele, for those who say CBN need a rate cut to spur growth, high inflation is highly inimical to economic growth.
“Indeed, many empirical studies have estimated the threshold level at which inflation becomes significantly growth retarding to be 11 per cent for developing countries. With ours at 18.3 per cent, one must question the judgment of cutting interest rates at this time. Finally, I think it is important to underscore those interest rates reflects not just the cost of capital but also the cost of doing business, and so we need to also look at interest rates from the perspective of the lender. Given that most banks have to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates,” the governor stated.
Although, most investment analysts said they are in accord with the MPC’s decision nevertheless, the pin drop silence regarding the apprehension on the credibility and transparency of the operations of the interbank market remains a concern yet to be allayed.
“We believe that the MPC press briefing may have been a perfect platform for the monetary policy managers to allay investors’ concerns regarding the interference of an invisible hand in market operations. We expect that the FX market will continue to face liquidity crunch while other macroeconomic indicators stay downbeat given limited fiscal space to substantially stimulate economic activity while FX administrative measures continue to restrict private capital inflows necessary to provide buffer for weak external current account operation,” the analysts unanimously agreed in an e-mailed note.