TUE, 22 NOV, 2022-theGBJournal| The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) today, unanimously voted to increase the Monetary Policy Rate (MPR) further by 100bps to 16.5% – the fourth consecutive rate hike and the highest rate since November 2002 (18.5%).
”We expect the Committee to raise the MPR by an additional 100bps,’’ Cordros Research analysts said in a note seen by theG&BJournal, after reviewing the various scenerio following the release of the inflation figueres recently by the National Bureau of Statistics (NBS).
Cordros had suggested that there is the need to march on with the interest rate hike to re-anchor inflation expectations back to the CBN’s medium-term targets.
Today’s hike brings the cumulative interest rate increase in 2022 to 500bps. The last time the MPR was at the 16.5% level was in July 2003.
Based on the voting pattern, nine members voted to increase the MPR by 100bps, while the remaining two members voted for a 50bps hike in the MPR.
Also, the Committee voted to retain the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5%, and Liquidity ratio at 30.0%.
According to Cordros, ”the MPC’s decision to increase the policy rate further by 100bps was in line with our expectation (see report: MPC Could Increase the Monetary Policy Rate Further) given the need to further consolidate the progress made with inflation (domestic inflationary pressures moderated month-on-month for the third consecutive month as of October).”
Notably, the Committee highlighted that it did not consider the loosening option, given that it would undermine the gains of the last three policy hikes. Accordingly, the options available to it were either holding or further increasing the key policy rate.
However, in addition to consolidating previous gains, the Committee opted for a further increase to narrow the negative real interest rate margin, improve market sentiments, and further restore investors’ confidence. In addition, the Committee guided that there is the need to continue to tighten but at a somewhat moderate pace.
This is because holding the key policy rate unchanged at a period close to the December festive season and expected heavy spending ahead of the 2023 general elections would jeopardise the gains of previous policy rate hikes and plunge the economy deeper into the inflation trap.
Market Impact
Fixed Income: Since the last policy meeting, investors sold off the long end of the curve, as the average yield closed higher at 14.69% on 21 November (+93bps vs 27 September: 13.76%). Cordos believes the outcome of this meeting will trigger another round of selling activities on the long end of the yield curve.
They expect investors to continue to play at the short end of the bond yield curve but sees scope for a continued uptick in FI yields as tightening global financing conditions will compel the government to increase reliance on the domestic market to finance the budget deficit.
Equities: Since the July MPC meeting, domestic investors have sold down their portfolios in response to an increased sensitivity to rising FI yields whilst remaining dominant players (74.1% market share as of October 2022). Thus, the ASI Year-to-date return is currently at +5.2% (H1-22: 21.3%) as of 22 November.
Given the outcome of the MPC, we believe the hawkish tone of the MPC will continue to worsen risk-off sentiments in the domestic bourse. However, we do not envisage any significant changes in the trading pattern as investors continue to trade cautiously, showing a weak appetite for stocks.
Overall, Cordros thinks trading in the equities market will remain choppy as income investors continue to cherry-pick stocks with sound fundamentals and attractive dividend yields. In contrast, risk-averse investors will likely stay on the sidelines until positive triggers propel market performance.
With the MPC meeting out of the way, it is believed developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse in the near term.
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