By Chioma Obinagwam
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to raise the Monetary Policy Rate (MPR) significantly by 400bps to 22.75% at its first meeting in 2024, higher than our expectation of 150bps.
Cordros Capital Ltd told Confiance News in a statement on Tuesday.
Thus, bringing the MPR to its highest level ever – 22.75%. Notably, the meeting reflects the committee’s commitment to ensuring price stability and managing inflation expectations in the near term. Furthermore, the committee voted to increase the asymmetric corridor to +100bps/-700bps (previously: +100bps/-300bps), the Cash Reserve Requirement (CRR) to 45.0% (previously: 32.5%) and retained the Liquidity ratio at 30.0%.
On Domestic Growth: As expected, the committee welcomed the sustained positive GDP growth trajectory in Q4-23 (+3.46% y/y vs Q3-23: +2.54% y/y) and highlighted the resurgence in the oil sector GDP growth due to a higher crude oil production as well as the improvement in the non-oil sector amid high inflationary pressures. Despite the economic headwinds, the CBN projects the economy to grow by +3.38% y/y in 2024, higher than the IMF’s forecast of 3.0% but lower than the FG’s projection of 3.88% y/y.
On Inflation: The MPC noted the sustained increase in domestic prices of both components in food and non-food items and attributed the upward pressure to the increased pass-through effect of the exchange rate depreciation, rising cost of energy, large fiscal deficit, and heightened insecurity in the food-belt region. Notably, the committee pointed out that inflation risks remain elevated. Hence, domestic prices are expected to remain elevated over the short term before the disinflationary process sets in.
On Foreign Exchange: The MPC noted the various distortions in the FX market and welcomed the ongoing reforms in the forex market, which include (1) unification of the FX markets, (2) promotion of the “willing buyer, willing seller” model, (3) removal of all limits on International Money Transfer Operators (IMTO) remittances, (4) introduction of a two-way quote system, and (5) broad reforms in the BDC segment of the market, and expects these changes to restore stability, enhance transparency, boost investor confidence and promote price discovery in the NAFEM market.
Cordros’ View
We had earlier conveyed that the CBN’s move in the money market to increase interest rates and the use of orthodox monetary tools to manage liquidity already indicated the institution’s maintenance of a tight monetary policy stance. Therefore, we stated that the MPC would retain this position at its meeting, raising the policy rate further. Whilst our prognosis was for an increase of the MPR by 150bps, the MPC surprisingly raised the benchmark rate by a whopping 400bps. We attribute the aggressive rate hike to the need to manage inflation expectations, which have been primarily stoked by the constant depreciation of the naira and the low credibility of the institution in maintaining price stability. Furthermore, we had expected that the CBN would hold other parameters constant; however, in line with the CBN’s goal to extensively mop up excess liquidity, the committee raised the CRR to 45.00%, 125bps higher than the previous rate of 32.50%, widened the asymmetric corridor to +100bps/-700bps (previously: +100bps/-300bps), whilst retaining the liquidity ratio at 30.00%. The committee also noted the global upside risk to domestic inflation, including the trade disruption stemming from the heightened geopolitical tensions. In line with our expectations, the MPC projects that central banks in advanced economies will retain high policy rates whilst global financial conditions remain tight.
In the short term, we expect that central banks in advanced economies will keep rates steady due to existing risks to inflation. Nevertheless, we hold the view that global inflation will maintain its deceleration path in the coming months due to declining energy prices and a higher base effect from the previous year. Conversely, domestic prices are projected to stay high due to the depreciation of the naira exchange rate, elevated cost of energy products and reduced food supply induced by heightened insecurity in the food-producing middle-belt region. The just concluded MPC meeting mirrors the committee’s zero tolerance for further inflation increases and highlights the need to enforce price stability, which, in their view, supports output growth in the medium to long term. However, we are of the opinion that the committee will hold its key policy rate constant at 22.75% at the next policy meeting scheduled for March 25-26, given the need to allow the current adjustment to permeate the economy whilst waiting for more macroeconomic data evidence to signify the path forward.
Market Impact
Fixed Income: In recent weeks, the fixed income market has remained bearish due to tighter liquidity conditions, selloffs induced by positioning for higher Primary Market Auction (PMA) issuances, elevated stop rates at the PMA, and an increase in consumer prices (+98bps to 29.90%). In as much as the market already anticipated an upward retracement in yields, we believe the outcome of the meeting will trigger further rounds of bearish sentiments across the mid-to-long end of the yield curve. Thus, we recommend investors maintain the strategy of playing at the short end of the yield curve. Sequentially, we maintain our expectation of an uptick in bond yields over the medium term. Aside from the impact of the higher MPR, our prognosis also takes into account expectations of a sustained imbalance in the supply and demand dynamics, more so that the FGN’s 2024FY borrowing needs remain sizeable.
Equities: Before the meeting, we noticed that the increase in yields in the fixed-income market reduced interest in equities, particularly among domestic institutional investors. Following the unexpected 400bps hike in the MPR by the MPC, we anticipate a further negative impact on the equities market performance in the short term. Indeed, the stock market closed with a 1.4% decline today, likely due to negative sentiment from investors, as rising fixed-income yields typically reduce the appeal of equities. Overall, the MPC’s hawkish stance is expected to further heighten risk-off sentiments in the local market, as domestic investors, who make up the majority of market participants (c.92.0% as of January 2024), may opt for safer assets amid rising fixed income yields. Consequently, we anticipate a prolonged bearish market trend driven by yield movements and the uninspiring corporate earnings reported thus far.
