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Carney Says U.K. Inflation Slowdown Doesn’t Change Outlook

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BOE
  • Carney Says U.K. Inflation Slowdown Doesn’t Change Outlook

Mark Carney said the latest unexpected slowing of inflation doesn’t change the outlook that price increases are going to accelerate as the decline in the pound lifts import costs.

“I wouldn’t take a steer from the October numbers,” the BOE governor said after data on Tuesday showed that price gains unexpectedly cooled last month. “Unfortunately inflation is going to go up — that’s the consequence of a very large move in the exchange rate.”

The drop in the inflation rate was driven down by the price of clothing and university tuition fees, but cost pressures built as the falling pound spurred the biggest jump in import prices in five years. Consumer-price growth was 0.9 percent compared with 1 percent in September, the Office for National Statistics said on Tuesday. The rate was forecast by economists to accelerate to 1.1 percent.

The slowdown will prove temporary, economists warned, as separate figures showed the cost of goods leaving factory gates surged 2.1 percent — the fastest annual pace since April 2012. Input prices jumped by 4.6 percent, the biggest monthly gain since records began in 1996. The BOE this month said inflation will go above the 2 percent target next year and stay there until the end of the decade.

The drop in the pound since the Brexit vote in June was both “necessary” and reflects the market’s expectation that the U.K. economy will become less open, Carney told Parliament’s Treasury Committee on Tuesday. He reiterated that BOE policy makers will look through above-goal price gains to support growth and the labor market as the economy adjusts.

“It’s better to take that in a little bit of inflation with more people employed and nominal wages growing a bit more, than doing the opposite and squeezing it out and taking much higher unemployment,” he said. “There are limits, though, to that.”

New Forecasts

The U.K. central bank will update its economic forecasts early next year when it has a better idea of how companies are adjusting to Brexit, Carney said. Companies are making plans but it’s too early to implement them, he said.

Carney also said arguments by politicians that loose monetary policies in the U.K. and elsewhere have widened inequality miss the mark.

“The focus on monetary policy is a massive deflection exercise,” he said. “It’s very important to distinguish the stance of monetary policy and the reasons why global interest rates are low,” he said, adding that “inequality is caused by much more fundamental factors.”

Central banks around the world have been criticized for keeping interest rates at record lows since the global financial crisis, undermining savers, weakening banks and widening pension deficits. U.K. Prime Minister Theresa May told delegates at the Conservative Party conference last month that loose monetary policy had had some “bad side effects” as people with assets got richer while those without have suffered. She said “a change has got to come.”

Neutral Bias

Her comments came after the BOE loosened policy further in August following the shock Brexit vote as they prioritized supporting growth. Earlier this month BOE officials shifted their guidance to say policy could head in either direction next after the weaker pound starting fanning inflation.

“Rates could go up, could go down,” Carney told lawmakers.

A recent survey conducted by Bloomberg from Nov. 4-11, found the median forecast of economists is for the BOE’s main rate to stay at 0.25 percent until at least the first quarter of 2019, just months before Carney is due to stand down as governor.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Forex

Nigeria’s Diaspora Remittances Decline by 28 Percent to $16.8 Billion in 2020

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US dollar - Investors King

Nigeria’s diaspora remittances declined by 27.7 percent or $4.65 billion from $21.45 billion in 2019 to $16.8 billion in 2020, according to the World Bank Migration and Development report.

A critical look into the report shows remittances to sub-Saharan Africa declined by 12.5 percent in 2020 to $42 billion. This was largely due to the 27.7 percent recorded by Africa’s largest economy, Nigeria, which accounted for over 40 percent of the total remittance inflows into the region.

The report noted that once Nigeria’s remittance inflows into the region are excluded, remittances grew by 2.3 percent in 2020 with Zambia recording 37 per cent.

Followed by 16 percent from Mozambique, 9 percent from Kenya and 5 percent from Ghana.

The decline was a result of the global lockdown that dragged on the livelihood of most diaspora and unclear economic policies.

In an effort to change the tide, the Central Bank of Nigeria (CBN) introduced a Naira 4 Dollar Scheme to reverse the downward trend and boost diaspora inflows into the economy.

However, the reports revealed that other external factors like insecurities, global slow down, weak macroeconomic fundamentals, etc continue to discourage capital inflows.

On Tuesday, the CBN, in a new directive, announced it has halved dollar cash deposit from $10,000 to $5000 per month.

The move is geared towards discouraging overreliance on the United States Dollar and encourage local patronage and production.

Mr. Guy Czartoryski, Head of Research at Coronation Asset Management, had said in the report, “We looked at the top 10 banks and the breakdown of their deposits showed that 40 per cent of their deposits are in dollars and it is quite astonishing.”

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Forex

Deposit Money Banks Reduce Dollar-Cash Deposits by 50 Percent to $5000/Month

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United States Dollar - Investors King Ltd

Nigeria’s Deposit Money Banks (DMBs) have reduced the amount of United States Dollars that customers can deposit into their domiciliary accounts by 50 percent from $10,000 to $5,000 per month.

A bank official who preferred not to be mentioned confirmed the new policy to Investors King.

He, however, stated that the new policy does not apply to customers making electronic transfers as well as oil and gas companies and dollar payments into government accounts.

Checks revealed that the Central Bank of Nigeria (CBN) introduced the new policy to discourage the strong appetite for the United States Dollar, which has continued to rise.

A recent report has shown that despite persistent dollar scarcity, around 40 percent of bank deposits in the nation’s top ten banks were in dollars.

Mr. Guy Czartoryski, Head of Research at Coronation Asset Management, had said in the report, “We looked at the top 10 banks and the breakdown of their deposits showed that 40 per cent of their deposits are in dollars and it is quite astonishing.”

According to an analyst at ARM Securities Limited, Mr. Olamofe Olayemi, “this has to do with how much confidence the people have in the naira. Over time, we have seen significant depreciation in the naira.

“If you look at what happened in 2020, no one expected that the naira would be devalued twice in that year and even the outlook, this year is suggesting further depreciation in the naira.

“So, it makes sense to a lot of people to store their money in dollars. But, from the CBN standpoint, you agree with me that there is dollar scarcity.”

He, therefore, argued that the new policy might discourage financial inclusion and encourage cash outside the banking system.

Again, it is important for the flow of money to be captured in the system,” he said.

The CBN had extended its Naira 4 Dollar Scheme last week to further encourage dollar inflow into the Nigerian economy.

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Naira

Naira Closed at N411.25 to US Dollar at NAFEX Window

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Naira Dollar Exchange Rate - Investors King

The Nigerian Naira declined further against the U.S Dollar on Tuesday ahead of the Ramadan holiday to trade at N411.25 to a single U.S Dollar at the Nigerian Autonomous Foreign Exchange (NAFEX) window.

The local currency plunged as low as N420.23 per dollar during the trading hours of Tuesday despite opening the day at N410.33/US$ before settling at N411.25 to a US dollar.

Investors on the window exchanged $98.33 million on Tuesday.

At the parallel section of the foreign exchange, Naira traded at N483 to a United States Dollar; N673 to a British Pound and N580 to a Euro.

Foreign exchange rates remained largely unchanged at the bureau de change section, with the Naira trading at N482 to a U.S Dollar; N674 to a British Pound and N584 to a Euro.

Several factors continue to weigh on the Nigerian Naira, especially with the foreign reserves hovering around record low and crude oil output not at an optimal level.

Other factors like rising inflation rate and drop in economic activity due to COVID-19 effect on the economy and lack of enough fiscal buffer to cushion the economy.

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