Analysts react to latest MPR hike by CBN

…says hike in subsequent MPC meeting not unlikely

Chioma Obinagwam

Analysts at Cordros Research, the research arm of Cordros Capital, have reacted to the recent Monetary Policy Rate (MPR) hike to 18.5 percent by the Central Bank of Nigeria (CBN).


Confiance News gathered from the weekly report of the company for the week ended May 26, 2023.


“In line with our expectations, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to further increase the MPR by 50bps to 18.5% – the seventh consecutive rate hike and the highest rate since November 2002 (18.5%). The Committee argued in favour of further smaller rate hikes to (1) consolidate the gains made so far, (2) support the efforts towards moderating demand-pull inflation, (3) narrow the negative real interest rate gap, and (4) boost the MPC’s credibility following the earlier forward guidance to continue to tighten when confronted with unabating price pressures.”


“We do not rule out the Committee increasing the MPR further at its next meeting in July, after which a ‘HOLD’ consideration is likely over subsequent meetings. Accordingly, we expect the Committee to increase the MPR by 25bps – 50bps in the near term, and also, we do not rule out the possibility of an increase in monetary interventions in growth-enhancing sectors,” it stated.


Here are excerpts of the report:

Global Economy

According to flash estimates from S&P Global, the United States (US) Composite PMI expanded to 54.5 points in May (April: 53.4 points) – the highest level since April 2022 (56.0 points). We highlight that the improved reading was primarily driven by the Services PMI (55.1 points vs April: 53.6 points) which rose to a 13-month high, reflecting the sturdy upturn in business activities amid stronger demand conditions. Meanwhile, the Manufacturing PMI, reversed the previous month’s gain, declining to 48.5 points (April: 50.2 points) reflecting deterioration in factory activities. We understand that the deterioration stemmed from weak demand conditions and a reduced need to hold inputs following improved delivery times and lower new order inflows. We believe the resilient job market and post-pandemic service demand bode well for private-sector activity over the short-to-medium term, and could probably fuel further inflationary pressures. Nonetheless, the tight financial conditions and uncertain economic outlook remain downside risks to overall private sector activity.

Headline inflation in the United Kingdom (UK) dropped to the single digit for the first time in eight months, primarily driven by the favourable base effects from the prior year and slowdown in energy prices. According to the Office for National Statistics (ONS), UK’s inflation eased by 140bps to 8.7% y/y in April (March: 10.1% y/y) – the lowest print since March 2022 (7.0%). Analysing the breakdown provided, food prices (19.0% y/y vs March: 19.1% y/y) remain sticky, while electricity & gas prices (24.3% y/y vs March: 85.6% y/y) increased slowly, positively influencing the slowdown in headline inflation. On a month-on-month basis, consumer prices rose by 1.2% (March: 0.8% m/m). While the data shows moderation in consumer prices, we highlight that price pressures remain sticky and still run ahead of the Bank of England (BOE) expectations. Accordingly, we expect the BOE to remain under pressure to increase the key policy rate further at its next meeting in June, with a possibility of further increase at the August policy meeting.


Global Markets

Global stock markets were broadly bearish this week as a stalemate in US debt-ceiling negotiations weighed on sentiments. As of the time of writing, US equities (DJIA: -2.0%; S&P 500: -1.0%) were on course to close lower following concerns about the US government edging closer to a possible default on its debt. Likewise, sentiments across European equities (STOXX Europe: -2.2%; FTSE 100: -1.8%) were dampened by pullbacks from stocks of luxury goods companies (i.e Prada, Hermes and Louis Vuition) and uncertainty around the US debt ceiling. In Asia, Chinese equities (SSE: -2.2%) dipped as China’s sluggish recovery weakened sentiments. Meanwhile, Japanese equities (Nikkei 225: +0.4%) were supported by a rally in tech stocks and other export-oriented shares amid the weakening of the yen. Conversely, the Emerging (MSCI EM: -1.4%) and Frontier (MSCI FM: -0.8%) market indices mirrored the downbeat mood across global stocks consequent upon losses in China (-2.2%) and Vietnam (-0.1%), respectively.



Domestic Economy

According to the recently released data by the National Bureau of Statistics (NBS), domestic economic activities sustained a positive growth momentum, albeit moderately in Q1-23. Specifically, real GDP grew slowly by 2.31% y/y in Q1-23 (Q4-22: 3.52% y/y), primarily due to the impact of (1) the cash scarcity which accompanied CBN’s naira redesign drive, (2) election uncertainties, and (3) lingering increase in production costs in the review period. While the decline in the oil sector (-4.21% y/y vs Q4-22: -13.38% y/y) moderated for the second consecutive quarter, we highlight that the non-oil sector’s growth eased to 2.77% y/y (Q4-22: +4.44% y/y). We expect the non-oil sector to grow higher by 3.18% y/y in Q2-23, in the absence of significant shocks to the economy.

In addition, we expect crude oil production to average 1.46mb/d in Q2-23, translating to a 1.34% y/y oil sector growth estimate. All told, we foreca

Cordros Research logo. Photo credit: Cordros Research.

st overall growth to settle at 3.11% y/y in Q2-23 and revise our 2023FY growth estimate to 2.92% y/y (Previously: 2.77% y/y).


Capital Markets


The local bourse rebounded from last week’s rout as strong bargain-hunting activities across tickers with attractive entry points pushed the All-Share Index higher by 1.5% w/w to 52,973.88 points. Precisely, investors’ interests in NESTLE (+10.0%) and MTNN (+1.5%) spurred the weekly gain. As a result, the MTD and YTD returns advanced to +1.1% and +3.4%, respectively. However, in terms of activity level, the trading volume and value declined by 35.5% w/w and 0.4% w/w, respectively. Elsewhere, the performances across sectors were broadly positive, as all our coverage indices – the Banking (+5.6%), Insurance (+3.6%), Oil and Gas (+3.2%) and Consumer Goods (+3.1%) – save for the Industrial Goods (-0.9%) index, posted gains.

We believe investors will continue to cherry-pick stocks while paying rapt attention to the outcome of Treasury bills and bonds auctions to gauge the direction of yields in the FI market. As a result, we expect cautious trading from domestic investors in the short term. Overall, we believe developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse in the near term.


Money market and fixed income

Money market

This week, the overnight (OVN) rate dipped by 238bps to 13.3% as inflows from FAAC allocation (NGN407.13 billion) and FGN Bond coupon payments (NGN17.87 billion) kept the financial system afloat with liquidity. Accordingly, the average system liquidity this week settled at a net long position of NGN339.93 billion, relative to the net short position of NGN29.89 billion in the prior week.


Barring any significant outflows from the system next week, we expect the OVN rate to continue to trend downwards, as the inflows from OMO maturities (NGN20.00 billion) and FGN bond coupon payment (NGN5.63 billion) are expected to support the already healthy liquidity system.


Treasury bills

Trading activities in the Nigerian Treasury bills secondary market turned bullish this week, as the average yield contracted by 18bps to 6.8%. Notably, this week’s bullish performance was attributed to the combined impact of (1) the improved system liquidity and (2) market participants moving to the secondary market to compensate for lost bids at Wednesday’s NTB PMA. At this week’s NTB auction, the CBN offered bills worth NGN180.45 billion – NGN9.96 billion of the 91-day, NGN1.82 billion of the 182-day, and NGN168.67 billion of the 364-day – to market participants. Demand was higher, especially for the 364-day bill (bid-to-offer: 4.4x), as the total subscription settled at NGN811.40 billion. Eventually, the CBN allotted exactly what was offered at respective stop rates of 2.29% (previously 4.50%), 4.99% (previously 6.44%), and 7.99% (previously 8.99%).

For next week, we expect yields in the NTB secondary market will maintain its current trend, supported by the buoyant liquidity in the system.



Proceedings in the FGN bonds secondary market were bullish this week, as investors cherry-picked attractive bonds across the curve, particularly at the mid and long segments of the naira curve. Consequently, the average yield across all instruments contracted by 8bps to 14.0%. Across the benchmark curve, the average yield dipped at the short (-25bps) and long (-2bps) ends, as investors demanded the MAR-2024 (-88bps) and JAN-2042 (-10bps) bonds, respectively. Conversely, the average yield closed flat at the mid segment.

We reiterate our view that frontloading of significant borrowings for the year by the FG will result in an uptick in bond yields, as investors demand higher rates in the face of elevated supply.


Foreign Exchange

Nigeria’s FX reserve shed the previous week’s gain, as the gross reserve position declined by USD16.25 million w/w to close at USD35.18 billion (23 May). The naira depreciated by 0.3% to NGN464.51/USD at the I&E window (IEW). On activity levels, the total turnover (25 May) at the IEW fell by 13.7% WTD to USD557.31 million, with trades consummated within the NGN449.92 – NGN632.00/USD band. In the Forwards market, the naira appreciated across the 1-month (+1.5% to NGN470.76/USD), 3-month (+6.6% to NGN485.78/USD), 6-month (+10.1% to NGN506.61/USD) and 1-year (+6.7% to NGN538.72/USD) contracts.

We believe the FX liquidity issues will remain over the short-to-medium term as we do not see any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels.

Moreover, considering the tepid accretion to the reserves given (1) low crude oil production and (2) elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.

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