TUE 25 JAN, 2022-theGBJournal- Considering the implications of global central banks’ normalisation of monetary policy and the need to attain domestic macroeconomic stability, the Monetary Policy Committee (MPC) voted unanimously to maintain the MPR at 11.5% at its recently concluded meeting. Similarly, the Committee also voted to retain the Cash Reserve Requirement (CRR) at 27.5%, liquidity ratio at 30.0% and asymmetric corridor around the MPR at +100bps/-700bps.
On domestic growth: The Committee expects the economy to remain on the path of positive growth given the continued rebound in economic activities and better-than-expected performance in Q3-21. Precisely, the Committee expects the economy to grow by 3.10% y/y in 2021E with a sustained expansion in 2022FY.
Although headwinds remain from the global economy, the Committee expects the domestic economic performance to continue to progress on account of improved vaccination, sustained fiscal & monetary stimulus and rally in crude oil prices. Overall, the Committee expects the economy to grow by 2.86% in 2022FY, according to the CBN’s estimate compared to our estimate (2.65% y/y vs 2021E: 2.94% y/y).
On Inflation: The Committee highlighted with concern the unexpected slight increase in the headline inflation for December (15.63% y/y vs November: 15.40% y/y), largely due to the festive-induced spending in December. Nonetheless, the Committee expressed confidence in the CBN’s sustained intervention programs, noting that the inflation rate would moderate as the food supply improves.
Overall, the Committee expects inflationary pressure to increase marginally in the short term before moderating at the end of Q1-22, given the bank’s intervention in the Agricultural sector and the impact of dry season’s harvest. Barring any significant shock to prices, we expect the base effect from the prior year to continue to slow down inflationary pressures over the short term. Overall, we project average inflation rate of 13.64% y/y in 2022FY (2021FY: 16.98% y/y).
Cordros’ View: The decision of the Committee to maintain the status quo on monetary policy parameters did not come as a surprise to us (see report: MPC to Retain MPR but with a Mild Hawkish Tone). Although the Committee expressed concerns about the impacts of policy normalisation in advanced countries on the exchange rate and domestic price pressures, they believed it was desirable to hold rates constant to allow previous policy actions to permeate the economy.
Though we find justification for the Committee’s decision on the grounds that output growth in the real sectors remains soft, we believe there would be a compelling need to tighten monetary policy as external sector pressures mount. For us, the timing of a change to a hawkish stance would be primarily hinged on the policy actions of global central banks as they redirect their efforts towards curbing inflationary pressures. In the near term, we believe the MPC will be walking on tight ropes as it attempts to drive economic recovery and stabilise the external sector.
Market Impact
Fixed Income: Considering that the MPR is increasingly becoming a signalling tool for market rates, we expect a neutral reaction from fixed-income investors. However, we expect aversion for long-dated instruments to persist due to medium-term expectations of a hike in interest rates. As a result, we recommend investors maintain the strategy of playing at the short to the belly of the yield curve.
That said, we expect frontloading of significant borrowings for the year to result in an uptick in bond yields as investors demand higher yields in the face of increased supply. In addition, unlike in the prior year, we expect more reliance on the domestic debt market in financing the budget deficit as rising global yields would make commercial borrowings more expensive in the face of tightening in global financing conditions.
Equities: Since the start of the year, the performance of the equities market has been broadly positive as the ASI returned +7.5% as of 24th January. With domestic investors being the dominant players in the market (c. 65.0% market share as of November 2021), we believe the wave of sell-offs across global stocks will have a limited impact on the local bourse. As such, we expect sentiments to remain positive until yields begin to rise in the fixed income market. Consequently, we see scope for the market to sustain the positive performance in Q1-22, given (1) investors’ positioning in dividend-paying stocks ahead of 2021FY dividend declarations and (2) bargain hunting activities in value stocks with sound fundamentals.-With Cordros Research
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