…What happens in the markets as investors digest the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) interest rates decision.
WED NOV 27 2024-theGBJournal| There is no doubt that decision to increase the key interest rate will have profound effect on the market in the coming weeks, even as analysts also had expected what was coming.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the MPR again, albeit moderately, by 25bps to 27.50% in the final meeting of the year, culminating in a total rate hike of 875bps in 2024. It was also the slowest pace of tightening this year, which fell short of Cordros Research forecast (+50bps) despite mounting inflationary pressures
The decision to raise the MPR further was in line with their goal to curb inflationary pressures, stabilize the naira, and anchor inflation expectations.
At the same time, the Committee voted to keep all other parameters unchanged – Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks at 50.0% and 16.0%, respectively; the asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30.0%.
While reaffirming their price stability mandate, the slower pace suggests the MPC may be approaching the peak of the rate-hiking cycle, though inflation risks remain skewed to the upside.
Notably, the MPC acknowledged the lagged effects of monetary policy tightening on inflation, expressing confidence that the impact of earlier rate hikes would begin to materialize by Q1-25.
Looking ahead, headline inflation is expected to increase further in November (+34.60% y/y vs October: +33.88% y/y) and December (+35.19% y/y), driven primarily by the lingering effects of elevated PMS prices, sub-optimal food harvests, and the seasonal uptick in consumer demand following the festive period.
At their next meeting in January 2025, the MPC is expected to evaluate consumer price trends and exchange rate stability while upholding its price stability mandate. With that in mind, Cordros Research say they anticipate another 25bps hike to 27.75%, followed by a potential pause in subsequent meetings.
Meanwhile, for the fixed income market, Cordros anticipates that the outcome will sustain the bearish sentiment in the fixed income market, even as they expect moderate increases in yields, particularly as we approach the end of the year, which is typically characterized by lower supply.
”Also, we believe that the elevated inflation outlook, as cited earlier, still portends possible rate hikes, and as such, we expect investors to remain duration averse, preferably maintaining to play at the short end of the yield curve,” Cordros added.
For the equities market, analysts believe the domestic equities market might react moderately to the outcome of MPC meeting yesterday, especially as the current rate tightening cycle may be approaching its peak amid anticipation of the usual year-end rally.
As previously noted, analysts expect continued rotation into the banks, especially as they are less affected by interest rate hikes and benefit from increased income on loans and other earning assets.
It also expected that investors will take advantage of any price dip in strong-performing stocks as they try to maximise alpha.
Nonetheless, domestic investors will continue to dominate proceedings (90.6% market share as of October), and sensitivity to any movement in fixed income yields will remain a downside to market performance in the medium term.
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