Forex demand seen rising at I&E window on CBN action

Foreign exchange demand is expected to increase at the Investors’ and Exporters’ window following the stoppage of forex supply to Bureaux de Change by the Central Bank of Nigeria, Renaissance Capital has said.

The CBN Governor, Mr Godwin Emefiele, had on Tuesday, at the end of the Monetary Policy Committee meeting, announced the stoppage of forex sale to the Bureaux de Change, saying they had turned themselves into “agents that facilitate graft and corrupt activities of people who seek illicit fund flow and money laundering in Nigeria”.

The Head of Africa Research and Africa Economist at RenCap, Yvonne Mhango, noted early last week, Nigeria, Kenya and Ghana’s monetary policy committees kept their policy interest rates unchanged at 11.5 percent, 7.0 percent and 13.5 percent respectively, as expected.

Mhango, in a note on Friday, said, “We believe Nigeria’s MPC is inclined to keep its policy rate at 11.5 percent for the short term because: 1) tighter policy would undermine credit extension, which the committee believes is necessary to stimulate manufacturing output; and 2) looser policy would worsen inflationary pressures and deepen Nigeria’s negative real interest rates, which would undermine investment.

“Our base case is that Nigeria keeps its policy rate at 11.5 percent until YE21. However, following the central bank’s decision (announced after the policy rate decision) to cease FX supply to the bureaux de change, we expect the parallel FX market premium to widen and demand for ‘cheaper’ FX at the I&E window to increase, placing pressure on the naira to weaken. We think this implies upside risk to the policy rate. We are forecasting a 1-ppt hike in the policy rate in 2022, to 12.5 percent.”

According to her, RenCap sensed from Kenya’s MPC statement that the risk to the policy rate is to the upside, given the upward price pressure from food and fuel in the near term.

Mhango said, “The committee partly attributes the increase in food prices to cereals and their products, and that of fuel to the rise in international oil prices.

“Our base case is that the policy rate is left at 7.0 percent until YE22, because the economy is operating below its potential. That said, we believe the probability of a rate hike is rising.”

According to the economist, Ghana’s MPC is of the view that inflation remains in the 6-10 percent target band on the “forecast horizon”.

She said, “We think this means the committee is likely to keep its policy rate unchanged until YE21. However, in the short term, we believe there is upside risk to inflation from higher fuel and cereal prices, and continued weakness in the cedi (which is not our base case view).

“We are forecasting a 1-ppt rate hike in 2022, when the economy is stronger, because we believe this will give the MPC scope to restore the relatively high positive real rates that Ghana is known for.”