TUE 23 NOV, 2021-theGBJournal- The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) Tuesday voted to retain the Monetary Policy Rate (MPR) at 11.5% while holding all key parameters constant, in line with market expectations.
Like the last MPC, the Cash reserve ratio is retained at 27.5%, the liquidity ratio at 30% while the apex bank MPC also voted to maintain asymmetric window of +100 and -700 basis points around the MPR.
On domestic growth: The Committee commended the continued recovery in output growth following the growth recorded in Q3-21. Accordingly, the Committee applauded the continued support of the fiscal and monetary authorities in supporting the recovery process despite persistent security challenges amidst inadequate infrastructure.
Besides, the Committee struck a cautious tone on growth prospects given expectations of a tightening in global financial conditions amidst continued slacks in the domestic labour market. Consequently, it urged both the monetary and fiscal authorities to sustain their support for the economy as the pandemic is yet to be over. Like in past meetings, the Committee urged the Federal Government to step up efforts to tackle security challenges so that it would not hamper business sentiments and derail the fragile recovery.
Notwithstanding, the Committee noted that with the sustained interventions by the CBN, economic activities would normalise in the short-to-medium term leading to improved output growth and lower inflationary pressures. Overall, the CBN forecasts the economy to grow by 3.10% y/y in 2021FY (Cordros forecast: 2.94% y/y).
On Inflation: The Committee highlighted the continued moderation of the headline inflation in line with the slower pace of increases in food prices and the non-food basket. However, the Committee acknowledged that the inflation rate remains above the CBN’s target range of 6.0% – 9.0% and the MPR of 11.5%.
Accordingly, the Committee expressed that sustained CBN’s intervention would narrow the output gap and lower inflationary pressure. Overall, the Committee expects the headline inflation to continue its downward trajectory as the harvest season sets in and the fiscal authorities improve the country’s security situation to ease the bottlenecks constraining food supply. Barring any significant shock to prices, we expect the base effect from the prior year to continue to slow down inflationary pressures over the rest of the year. Overall, we project average inflation rate of 16.90% y/y in 2021FY (2020FY: 13.21% y/y).
Cordros’ View
The decision of the Committee to maintain the status quo on monetary policy parameters is in line with market expectations. The CBN Governor noted that the Committee was faced with whether to ease its accommodative stance, maintain the status quo or tighten to bring down inflation closer to the bank’s medium-term target of 6.0% – 9.0%. On tightening, the Committee expressed that although it would help suppress inflationary pressures, it would constrain the flow of credit and subdue output growth.
The Committee also felt loosening would lead to further widening in negative real returns and magnify price distortions in the financial market. As a result, the Committee believed maintaining the status quo would allow gains from its accommodative monetary stance to continue to permeate the economy.
That said, the Committee reiterated the need for the apex bank to sustain its direct intervention in the growth-stimulating sectors to strengthen the recovery process.
We observed that a recurring theme at this meeting centred on the likely impacts of the normalisation of monetary policies by central banks in advanced countries. We think the concerns of the Committee is justified given the attendant effect of rising global bond yields on capital flows into emerging economies like Nigeria. Moreover, there has been a chorus among systemically critical central banks to wind down their asset purchase programme.
Notably, the US Federal Reserve has announced its decision to begin reducing the monthly pace of its net asset purchases by USD15.00 billion later this month and by USD30.00 billion beginning in December. Our baseline expectation is that the Fed would wind down its net asset purchases by June 2022 based on the current pace of reduction, paving the way for a possible rate hike in H2-22. Thus, to our minds, the underlying tone of the Committee suggests the apex bank is bracing up for a change to a hawkish policy from Q2-22, a period that we think the Committee will judge that substantial progress has been made in supporting economic recovery.
Market Impact
Fixed Income: We do not expect material deviations from the current dynamics of the FI market, considering that the MPR is increasingly becoming a signalling tool for market rates. We believe medium-term expectations on a hike in interest rates will continue to drive aversion for long-dated instruments. As a result, we believe bond investors are likely to maintain the strategy of playing at the short to the belly of the yield curve. With the attractive returns on fixed deposits and upside risks to inflation on the horizon, we expect investors to resist the DMO’s attempt to bring down rates at bond auctions to improve inflation-adjusted returns. Notwithstanding, we believe deliberate efforts by the DMO to reduce borrowing costs for the government will keep the yield curve below 14.0% levels.
Equities: Since the last MPC meeting in September, bullish sentiments have dominated the local bourse. The YTD returns currently stands at 7.4% compared to a negative of 0.1% as of the end of September. We believe the positive performance was supported by the impressive 9M-21 earnings delivered by companies amid the euphoria that greeted MTNN and AIRTELAFRICA announcement of Approval in Principle (AIP) obtained from CBN regarding applications for Payment Service Bank (PSB) license. The outcome of the MPC meeting has already been priced; hence, we expect a neutral reaction from market participants.
Overall, we see scope for the market to sustain the positive performance in Q4-21, given (1) investors positioning in dividend-paying stocks ahead of 2021FY dividend declarations in Q1-22 and (2) prospect of increased activities from FPIs supported by improved liquidity conditions at the IEW.
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