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RBNZ Still Expects to Cut Interest Rates to Fresh Record Low

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New Zealand Dollar

New Zealand’s central bank said it still expects to cut interest rates to a fresh record low to revive inflation.

“Interest rates are at multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,” Reserve Bank Assistant Governor John McDermott said in a speech published on the bank’s website Tuesday. September quarter inflation data, due for release Oct. 18, “is expected to be low,” he said.

The comments reinforce bets that the RBNZ will lower its official cash rate by a quarter point to 1.75 percent at its next policy decision on Nov. 10. The bank is battling persistently weak inflation even as New Zealand’s economy grows at one of the fastest rates in the developed world and its housing market booms.

The New Zealand dollar extended its decline after the comments, falling to 70.64 U.S. cents at 4:50 p.m. in Wellington — the lowest since late July. Investors now see an 81 percent chance of a rate cut next month, up from 70 percent yesterday.

‘Robust Pace’

McDermott, whose speech was titled “Understanding Low Inflation in New Zealand,” said much of the weakness in price pressure can be attributed to global developments that have driven up the Kiwi dollar and suppressed the cost of imports.

“Strong net immigration and increased labor market participation have also boosted the supply potential of the economy, meaning that New Zealand has been able to grow at a robust pace without generating significant inflation,” he said.

The bank expects inflation to rebound in the December quarter to the bottom of its 1-3 percent target range. Currently running at 0.4 percent, inflation has been below the 2 percent midpoint the RBNZ targets for five years.

RBNZ Governor Graeme Wheeler has expressed concern that ongoing weak headline inflation may result in further declines in price expectations and create a deflationary spiral.

“Low inflation becomes a concern if it leads to the possibility of deflation,” McDermott said. “Although we do not see any significant risk of deflation in New Zealand, deflation carries important costs.”

Some economists argue the RBNZ is too fixated on weak inflation and risks fueling a housing bubble with even lower borrowing costs. House prices rose 14.3 percent in the year to September, and the average price in largest city Auckland has almost doubled since 2007 to more than NZ$1 million ($707,000).

The economy is also barreling along, expanding 3.6 percent in the second quarter from a year earlier. That compares with growth of 3.3 percent in Australia, 2.2 percent in the U.K and 1.3 percent in the U.S.

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

Naira to Dollar Exchange Rate in 2020

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naira

Naira to dollar exchange rate in 2020 declined by N73 from N306 Central Bank of Nigeria sold it in the beginning of the year to N379 and N386 on the investors and exporters forex window.

The Naira to dollar exchange rate in 2020 has been marred by a series of economic uncertainties and weak macro fundamentals caused by the COVID-19 pandemic.

At the beginning of the year, the official Central Bank of Nigeria’s naira to dollar exchange rate stood at N306 to a US dollar, while on the parallel market popularly known as the black market, the local currency was exchanged between N350 to N360 per US dollar.

On the investors and exporters’ foreign exchange window instituted by the central bank to mirror a free market, the naira was exchanged at N325 to a United State dollar.

However, unclear economic direction amid a 50 percent increase in Value Added Tax from 5 percent to 7.5 percent and border closure hurt the Nigerian economic outlook and plunged investors’ confidence in the economy even before COVID-19 outbreak.

This weak sentiment metamorphosed into broader economic decline when COVID-19 broke out in the country on February 27 2020 as investors that were doubting President Buhari economic path see no reason to wait any longer or believe Nigeria has what it takes, in terms of the health system, to contain an impending health catastrophe.

The surged in demand for US dollar by those looking to move their funds out of the country compelled Governor Godwin Emefiele led central bank to adjust the Nigerian Naira foreign exchange rate from N306 to a US dollar to N360 in order to discourage capital flight while simultaneously sustain dwindling foreign reserves.

But with global oil prices plunging to as low as $15 per barrel, below Nigeria’s $17 per barrel cost of production and demand for the commodity, especially Nigeria’s crude oil at almost zero during the peak of COVID-19, foreign investors were willing to lose N54 per US dollar to exit the Nigerian market.

According to a JPMorgan report, central bank forex backlog was over $5 billion, yet foreign reserves continues to drop. Left with little to no choice, the federal government approached the International Monetary Fund (IMF) for $3.4 billion financial assistance while the apex bank devalued the Naira again to the currency $379 to a US dollar and N386 on the investors and exporters window.

Despite the negative impacts of COVID-19 on the Nigerian people and the broad-based decline in economic activities that saw the nation’s Gross Domestic Product (GDP) contracting by 6.10 percent in the second quarter of the year and the unemployment rising as high as 27.1 percent or 21.8 million people in an import-dependent economy, the apex bank did not just devalue the Naira twice, the Federal Government raised electricity tariffs and remove subsidy in an economy with very weak consumer spending.

With the series of economic uncertainties, investors in forex forward market in London started offering Naira future contracts for N545, saying the apex bank no longer have the resource to support the Naira given the current global situation.

True to their words, Naira to Dollar exchange rate in 2020 plunged to N480 on the black market amid persistent forex scarcity before recently moderating to N467 when the central bank resumed forex sales to the bureau de change operators across the country.

Also, with the economy expected to plunge into an economic recession for the second time in four years in the third quarter of 2020, the Naira to Dollar exchange rate is expected to suffer even further in 2020.

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Forex

Naira Drops N2 on Black Market Even With 11.5% Interest Rate

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interbank

Naira Declines on Black Market Despite Lower Interest Rate

Nigerian Naira traded at N467 to a US dollar on the back market on Wednesday despite the Central Bank of Nigeria’s led monetary policy committee lowering the interest rate by 100 basis points after months of saying NO.

The local currency declined by N2 from N465 it exchanged on Tuesday to N467 on Wednesday as investors doubt the new interest rate would be effective given the size of the nation’s economic woes.

Also, the central bank rate adjustment was seen by most as recession validation. Experts and even the apex bank had predicted that except the nation recorded strong growth in the third quarter, Nigeria would slide into recession for the second time in four years.

This was after Nigerian currency was devalued twice to accommodate the nation’s weak foreign reserves in the wake of low oil prices and the drop in demand for the commodity.

Since then, the central bank has injected a total sum of N3.5 trillion into the economy to mitigate the negative impact of COVID-19 on the nation and support gradual improvement in productivity.

However, the decision of the Federal Government to raise electricity tariffs and remove petrol subsidy at a time when 27.1 percent of the working population or 21.8 million people are out of jobs with COVID-19 eroding consumer buying power, further weighed on sentiment and send the wrong message to potential investors and businesses.

Against, the British pounds the Nigerian Naira traded at N600 while it was exchanged at N545 to a European Union common currency.

With labour declaring a nationwide industrial action starting from Monday September 28, Nigeria’s detoriating economic outlook may further plunge the Naira value against global counterparts.

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Forex

Naira Remains Pressure at N465/US$ Despite BDCs Expecting $50.9m from CBN

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Naira Remains under pressure

Naira Remains at N465/US$ Despite BDCs Expecting $50.9m Injection from CBN

The Nigerian Naira remained under pressure despite the Central Bank of Nigeria’s foreign exchange sales to the bureau de change operators (BDCs).

Since the apex bank resumed forex sales about two weeks ago, the local currency had only improved slightly against global counterparts as investors and businesses doubt the central bank’s ability to sustain forex intervention given the weak foreign reserves and low oil prices.

Two weeks ago, the apex bank injected $51.8 million into the foreign exchange market to ease scarcity and support Naira’s value, however, despite the amount injected, the local currency only moderated slightly from N480 to a US dollar to N443 before depreciating back to N465 following the increase in electricity tariff and complete subsidy removal.

In what appeared like investors have started pricing in a further decline in consumer spending, especially with inflation hovering above 13 percent and expected to rise further with an increase in prices.

Also, Nigeria’s unemployment rate remained high at 27.1 percent, meaning apart from weak revenue generation and definitely low tax revenue, businesses will not be creating enough jobs to cushion the impact of COVID-19 on the economy.

A situation expected to further weigh on Naira outlook against global counterparts, even with central bank forex sales.

The Naira exchanged at N465 to a US dollar on Tuesday despite Bureau de change operators expecting $50.9 million forex allocation from the central bank today. This means, the market no longer expect a meaningful impact from the apex bank intermittent intervention because of the disparity in the amount being injected and forex backlog estimated at slightly over $5 billion.

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