ANALYST INSIGHT: CORONATION A.M.
Reform is on the agenda again, and this time it affects Naira interest rates. As we detailed the penultimate week, Finance Minister Wale Edun announced (on 23 October) the imminent arrival of $10.0bn to shore up the nation’s foreign exchange reserves and its foreign exchange market. On the same day CBN Governor, Yemi Cardoso, declared that the CBN would take its job of fighting inflation very seriously. What evidence do we have to support his assertion, so far?
The evidence comes from recent Open Market Operations (OMO), which are held by the CBN. The clearing rates (or stop rates) have been moving upwards, likewise the effective yields. OMO auctions are a way of influencing market interest rates by draining (and, sometimes, not draining) liquidity from the market. At its OMO auction in at the end of October the CBN offered N400.0 billion in OMO bills (against N150.0 billion back in August) and allotted the amount offered, with the stoprate for a 364-day bill settling at 17.50%, an effective yield of 21.21% pa. The next OMO auction, two days later, achieved a 21.62% yield for the same maturity.
Not surprisingly, Treasury bill rates have been affected. With money being drained out of the market, yields in the secondary market for 1-year T-bills moved up to 17.61% at the end of the penultimate week. These are much better rates than savers have seen all year. What are the objectives? Clearly, one objective is to support the Naira in the foreign exchange market by improving Naira returns; another, quite likely, is to address inflation which runs at 26.72%.
Does this mean a reversal in the CBN’s interest policy? It was four years ago to the month that the CBN crashed OMO rates (by disqualifying certain institutions from holding them) and thereby crashed T-bill rates. For four years T-bill rates have not even approached the rate of inflation, and inflation has moved up.
To raise rates is likely intended to address inflation, but it comes at the risk of raising borrowing costs, which is always a sensitive issue. We think that the CBN has a fine balancing act to play. As for pronouncements on interest rate policy, we will learn more from the Monetary Policy Council (MPC) meeting on 21 November. For now, the news is good for savers.