Market Indicators Unmoved by CBN’s CRR Decision

Major money market performance indicators seem unaffected by the Monetary Policy Committee (MPC)’s decision on the Cash Reserve Ratio (CRR) for public sector deposits in July.
Apart from the initial impact it had, interest rates later stabilized in the month of August and fell back to an average of 14.25 percent, not too distant from the 11.8 percent it stood in July. Analysts are sure the impact will abate before the end of the third quarter.
There was also little impact on the bond market as yields managed to creep from 13.33 percent in July to 13.57 percent in August.
As for the foreign exchange market, the central bank had to battle to save the naira through series of intervention, with the sometimes discharges of foreign currencies by energy firms into the market.
The interbank rates rose to a year-high average of 21 percent per-annum (p.a.) in response to the monetary policy decision on the Cash Reserve Ratio (CRR) for public sector deposits in July. The policy took effect on August 7, as the Central Bank effectively debited N1trn from banks’ accounts. This caused an initial squeeze in liquidity which forced interbank rates to trend up- wards but thereafter stabilized to an average of 14.25 percent p.a. in August, compared to July’s aver- age of 11.8 percent p.a. 
“We expect the impact of the CRR debit to abate by the end of Q3’13 and rates return to the two percent band of the benchmark policy rate due to our muted inflation outlook, said Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company (FDC) Limited.
Also, despite the CRR debit, bond yields (2Y, 3Y, 5Y, 7Y and 10Y) averaged 13.33 percent p.a in August compared to 13.57 percent p.a in July. Considering the downside risks to the naira coupled with the upside risks to government spending and benign inflationary conditions, we believe that debt investors will hold their current position. This is because the equities market performed poorly in the month amidst huge sell pressures occasioned by concerns for corporate performance given the high interest rates and global economic pressures. Traditionally, high interest rates implies exodus of funds from equities market and with increased risks and liquidity concerns, portfolio managers are expected to favor fixed income.
The naira at the official and parallel markets was firm in August due to the Central Bank’s bi- weekly forex sales and forex inflows from multinational companies. At the interbank market however, the naira depreciated due to strong demand pressures from importers and some corporates to meet their dollar obligations.
The central bank support for the naira notwithstanding, strong demand pressure from corpo- rates to meet dollar obligations would continue to influence naira depreciation. Also, the down- side risk of declining oil receipts still exist, as Nigeria receives over 70 percent of its forex inflows from oil proceeds. Decline in oil revenue will affect Nigeria’s balance of trade position and ultimately, the value of the naira. However, we expect the naira to trade around current levels supported by the central bank interventions, barring significant inflows from oil companies.

Leave a Reply

Your email address will not be published. Required fields are marked *