2012 Series I: What will CBN do?
This is the first in the series of posts about what we should expect from the Central Bank of Nigeria (CBN) in 2012 from my perspective. It has become critical to follow the CBN closely, given the current global economic conditions.
The Federal Reserve of the US has alerted the public that they intend to keep interest rates low till 2014. Meanwhile 2012 is an election year with the chances of increased spending in the face of a flagging economy and weak confidence. This could be a recipe for a stagflation, inflation in the presence of recession. The Euro is in its own crises with the latest victim being Spanair, a Spanish Government sponsored airline, that closed shop in January 27, 2012. China looks like it is entering its own round of housing bubble with prices of real estate running ahead of the urbanization rate in the country. These do not look good for the global economy, hence the need to keep a close eye to what the central bankers are doing in order to navigate the shark infested waters of financial assets.
It will be very tough for the CBN to justify a reduction in the monetary policy rate (MPR) tomorrow. The only reason they could ascribe to a reduction in rates is to encourage lending by the banks and to make business easier for Nigerians. This could defeat the tough stance that the CBN had held all along with the fight towards driving inflation down to single digits and stabilizing the Naira; this will be a very dumb move and the chances of this occurring is 5%.
The chances of keeping the MPR at 12.0% is about 85%. This is largely due to the fact that interbank overnight rates are already at a premium to the MPR while one year treasury bills are yielding over 16%. This is a far cry from a few months ago when treasury bills were selling at a discount to the MPR. For all intents and purposes, the CBN seems to have achieved its aim of reducing systemic liquidity and stabilizing the local currency over the past few months. I expect the CBN to continue with its open market operations over the next few months instead of increasing the MPR.
An increase in the MPR will be an overkill but it is more likely for it to be raised than for it to be reduced. Hence, my belief that the chances of increasing the MPR is 10%. This could be justified by the increase in fuel prices by about 50% and the implementation of the N18,000 ($112.50) minimum wage by the Federal Government of Nigeria, which could fuel inflation and throw the Naira into a tailspin. However, the open market operations carried out by the CBN has been successful and I expect this to continue rather than an increase in the MPR.
Therefore, I strongly believe that the CBN will keep the MPR at 12.0%, come tomorrow.