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Some
finance experts say money and treasury bill rates are expected to rise
in the short to medium term due to the tightening in monetary
conditions.

This
is also because the government’s ability to inject substantial amounts
of liquidity will be limited, as the excess crude account has been
depleted, although recurring spending is still likely to remain robust
ahead of the 2011 general elections.

In
a move that took most industry watchers by surprise, the Central Bank
signalled a move towards a tightening of monetary conditions in the
country with its decision to increase the policy rate (MPR) by 25 basis
points from 6.0 percent to 6.25 percent, in contrast with market
expectations.

The
decision comes in the wake of indications last week by the bank
governor that the policy rate may remain neutral. However, the threat
of higher inflation rates as the nation enters into the early stages of
the 2011 general elections cycle may have persuaded the rate-setting
committee to move away from its previously accommodative position.

“Overall,
this means short-dated rates will incrementally catch up with
long-dated bond yields, which have been tilted to the upside given the
DMO’s incremental issuance needed to bridge this year’s rising fiscal
gap (N120 billion in September, from N126 billion in August and a
median of N80 billion in half year 2010)”, said Samir Gadio, emerging
markets strategist, Standard Bank Plc.

Afrinvest,
an investment firm, said while the upward revision to the Standard
Deposit Facility was largely in line with its expectations, it views
the revision to MPR as mildly surprising given the restated commitment
of the Central Bank towards growing credit to the real economy.

“The
magnitude of this change, however, reveals only a slight concern,
notably within the context of recent inflation data, which suggests a
gradual upward trend,” the firm stated.

Lending challenges may remain

The
benchmark rate had been maintained at a record low level of six percent
since July 2009, amid an accommodative monetary framework as the
Central Bank attempted to revive private lending and boost growth, even
as private sector credit expansion decelerated further to 9.8 percent
in July.

As
such, experts say a turnaround in lending to the real economy has not
materialised, despite systemic excess liquidity, which highlights the
weakness of the monetary transmission mechanism, especially given the
structural issues in the banking system.

“Accordingly,
we think AMCON’s role will be critically important to improve risk
perception across the board and progressively boost financial
intermediation and lending over the next few years. It will also
ultimately contribute to allaying fears of investors, which have caused
the recent poor performance of the Nigerian Stock Exchange, with the
banking sector weighting heavily on the index,” Mr. Gadio said.

Addressing Inflation

The
Central Bank also factored in a higher inflation environment, as it
reiterated its earlier position on the threat of inflationary pressure
arising from several other factors.

Mr.
Gadio, however, said that the MPC will probably revise its year-end
forecast given that single-digit consumer prices are highly unlikely in
the framework of the new CPI basket, released by the National Bureau of
Statistics.

“In
our view, this makes sense if one factors in the relatively weak money
multiplier and sluggish credit metrics. Additionally, the volatility in
inflation is still driven by its exogenous component, which would make
tricky the implementation of inflation targeting in the near future,”
Mr. Gadio said.

The
committee noted that the key policy challenges remained the continuing
sub-optimal growth in money supply, coupled with the negative growth in
private sector credit, as well as the subsisting high retail lending
rates in the face of substantially low wholesale inter-bank and retail
deposit rates.