The naira fell against the dollar at the interbank foreign exchange market to an all-time low of 334.50 on Wednesday, a day after the Central Bank of Nigeria’s Monetary Policy Committee hiked interest rates to lure foreign investors back into local assets.
The naira had closed at 310 against the interbank market on Tuesday.
About $10m was traded at the new record low, Reuters reported.
Foreign exchange traders said investors were pushing the currency lower to test the limit of how far it could fall, given a spread of almost 12 per cent between the official and black market naira rates.
“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,” one trader told Reuters.
Economic analysts said the fall in the value of the naira against the dollar at the interbank market had nothing to do with the increase in the Monetary Policy Rate.
A currency analyst at Ecobank Nigeria, Mr. Kunle Ezun, said the exchange rate was reacting to the interplay of demand and supply at the interbank market.
He said, “This is what the interbank forex market really wants, that is, a situation where only the forces of demand and supply will determine price. So far, the CBN has not intervened this week. The rate at the interbank market today has nothing to do with the increase in the MPR.
Ezun said a depreciating naira might attract some foreign portfolio investors into the economy but would cause higher inflation in coming months.
“There is no shortcut. Rising inflation will affect consumer demand and the value of the naira,” he added,
An expert and Partner, Transaction Advisory Services, Ernst and Young Nigeria, Mr. Bisi Sanda, said the CBN’s Monetary Policy Committee should have reduced the interest rate in order to stimulate economic growth, instead of increasing the MPR.
He said, “The inflation we are experiencing is not caused by a shift in demand curve, but a shift in the supply curve. Instead of hiking the interest rate, we should have reduced it in order to stimulate growth through increased spending.
The voting pattern at the MPC shows that not all the members are actually in support of the increase in the interest rate.”
According to the Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chuwkwu, the CBN needs to act fast and restore confidence back to the market.
This, he said, could be done by ensuring that the exchange rate stability is achieved as soon as possible.
Chukwu said, “As it is, there is no amount of depreciation or devaluation that happens that will give foreign portfolio investors confidence. They want to see stability. They want to be able to predict the naira.
Once there is stability, confidence will return. The CBN may do this by accessing a lifeline from the International Monetary Policy Committee.”