Naira Reduces Despite Market Change

Despite the interest rate hike by the Central Bank of Nigeria (CBN ) last Tuesday to try to lure foreign investors into boosting liquidity in the interbank market , the naira yesterday continued its reduction against the dollar , weakening to N 330. 12 to the greenback.
Traders said that $ 10 million was traded on the interbank market yesterday , attributing the local currency ’ s weakness to the fact that investors were pushing the currency lower to test the limit of how far it can fall , given a spread of almost 12 per cent between the official and parallel market naira rates . Reuters quoted a trader as saying, “ If we have more people trying to buy the naira then it should strengthen . I think we will keep seeing the trickles …
I don ’ t think we will see large inflows until the fundamentals of the economy improves . ” The CBN ’ s rate setting body , the Monetary Policy Committee ( MPC) at its meeting last Tuesday hiked the benchmark interest rate- the Monetary Policy rate (MPR )- by 200 basis points to 14 per cent .
Most local analysts , citing data showing that the economy is entering a recession , had predicted that MPC would leave the rate unchanged . However , the CBN Governor , Mr . Godwin Emefiele, who announced the decision of the MPC, said that in taking the decision to increase the MPR , members of the committee noted that the negative real interest rate was not helping the foreign exchange market , as foreign investors had remained lukewarm and were unwilling to bring in new capital . He said the decision to raise interest rate would in addition to curbing inflation , boost liquidity of the foreign exchange market and ensure its sustainability.
The CBN boss also said members were of the opinion that the liquidity of the foreign exchange market would boost manufacturing and industrial output, thereby stimulating the much needed growth.
Reacting to the rate hike , the Managing Director, Financial Derivatives Company (FDC ) Limited , Mr . Bismarck Rewane, said although the decision would lead to an increase in borrowing cost for the Small and Medium -scale Enterprises ( SMEs ) , it was a tactical move to attract the much -needed foreign capital into the economy . Similarly, analysts at Renaissance Capital , said the firm backed the decision, as it would help the CBN to solve the key problem of attracting dollars into the economy