Post MPC – NOVEMBER 2020 (Re : MPC Maintains Status Quo as the Naira Struggles)

Dear Subscriber,

No change! Pas de changement !! Nihil se mutare!!!

As widely expected, the MPC left the policy rate unchanged (11.5%p.a). In 14 of the last 17 meetings, status-quo was maintained and the market yawned. This time, the concerns were more troubling as they include rising inflation (14.23%) and negative growth (-3.62%), a classic case of stagflation.

One of the most potent inflation stoking factors remains the exchange rate pass-through effect on domestic prices. It is believed that every 1% devaluation of the Naira results in a 0.2% impact on consumer prices.

The growing gap between the official and the parallel market rates has recently become a subject of controversy. The effective exchange rate of the Naira in the face of scarcity has jumped sharply. As of today, the currency is trading at N487/$ at the parallel market while the official rate is N379/$. The exchange rate is the price of one currency in terms of another. The price of any commodity including that of a currency is typically determined in the market. There is a difference between the effective and a nominal price. But it is the effective price that matters, Larry Summers, the renowned economist says it all “The invisible hand is more powerful than the hidden hand” in the determination of an equilibrium price. The invisible hand clears the market at an effective price but the hidden hand intervenes in the market at an artificial price.

In the slides, Bismarck Rewane reviewed the immediate and wider implications of the MPC’s decision on the Nigerian economy and the markets on Channels TV News at 10pm yesterday.

Do enjoy your read…