CBN increase its MPR by 50bps to 18% making it the highest in eleven years 

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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) today, resolved by a majority vote to increase the Monetary Policy Rate (MPR) by 50bps to 18.0% at its March policy meeting. Thus, the MPR is now at its highest level since November 2002 which was at 18.5% then. 

As analysts envisaged, the voting pattern shows that an aggressive rate hike was entirely out of the conversation at this meeting as 10 members voted to raise the MPR by 50bps, 1 member voted to increase the MPR by 25bps and the remaining member voted to hold the MPR.
In the same vein, the Committee voted to maintain other policy parameters at current levels; the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5%, and Liquidity ratio at 30.0%.

On domestic front: The MPC acknowledge the improved domestic economic activities in Quarter4-2022 (3.52% year on year vs Quarter3-2022: 2.25% year on year), attributing the performance to the (1) sustained growth in the services and agriculture sector and (2) CBN’s continued intervention in growth-enhancing sectors. Likewise, the Committee expects that real GDP will sustain its recovery for the rest of 2023 but at a subdued pace because of the evolving and persisting shocks to the domestic economy.

On Inflation: The Committee was concerned about the marginal increase in year-on-year headline inflation in February, primarily due to higher food prices in the period. Still, the MPC noted that the risks to domestic prices remain high, including (1) expectations of the PMS subsidy removal, (2) increases in other energy prices, (3) exchange rate pressures, and (4) legacy infrastructure challenges.

In line with Cordros’ research analysts expectations, before this meeting, they stated that the MPC is at a crossroads of navigating between the Scylla of pausing as risks of overtightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff (see report: Arguments in Favour of a 50bps Hike in MPR).

Thus, analysts argued for a 50bps hike in MPR as a balance between the two dilemmas as they envisaged. The Committee opted for a 50bps increase in the key policy rate noting that the debate at this meeting was whether to (1) continue its rate hike to further dampen the rising inflation trajectory or (2) adopt a HOLD stance to observe emerging developments and allow for the impact of the last five rate hikes to permeate the economy.
In the Committee’s view, the persisting headwinds to headline inflation provide a compelling argument for an upward adjustment to the key policy rate, albeit slowly. Elsewhere, given the recent cases of bank failure in the United States and Switzerland, the MPC highlighted that it examined the impact of further policy rate hikes on the stability of the banking system.
In its assessment, the Committee was convinced that further rate hikes would not adversely impact the Nigerian banking system’s stability. However, the Committee called on the CBN to strengthen its regulatory oversight of the banking system to ensure that the banking industry remains stable and resilient.
Before the Silicon Valley Bank (SVB) failure, markets priced in a 50bps hike in the Fed’s key policy rate ahead of its March 2022 meeting. However, since the SVB’s failure, there has been a material shift in market expectations, with consensus pricing a 25bps increase in the key policy rate apiece at the March and May policy meeting, after which the Fed is likely to adopt a hold stance at subsequent meetings.
Moreover, despite the recent challenges, we think if the US Fed abruptly stops hiking the Fed rate to drive inflation back to the target, it could damage its forward guidance credibility, driving inflation higher. The preceding could fuel higher rates in the future than currently priced.Thus, we lean towards the current market expectations, said analysts.
In analysts view, these expectations are positive in shaping the CBN’s monetary policy decisions going forward. Nonetheless, in the domestic economy, consumer prices are expected to remain sticky despite the favourable base effects.
Moreover, the near-term growth outlook remains clouded by increased downside risks exacerbated by the self-inflicted impact of the CBN’s naira redesign drive amid increased production costs.
On a balance of factors, given that the end of rate hikes by systemic global central banks is in sight amid sticky domestic inflation, we think the MPC is likely to maintain a slower rate hike at its next policy meeting.
Indeed, at the post-MPC conference, the CBN governor maintaining an aggressive tightening poses risk to financial system stability. Accordingly, CBN governor, Godwin Emefiele, the MPC will adopt a strategy of smaller rate hikes going forward to narrow the negative real returns amid the risks of overtightening.

Fixed Income: While there is a possibility of a strained reaction given the weak interest rate transmission to fixed income yields as seen in recent times, experts think the outcome of this meeting is likely to trigger further rounds of bearish sentiments across the mid-to-long end of the yield curve, albeit moderately.

Moreover, analysts expect an aversion to long-dated instruments to persist due to near-term expectations of a further moderate increase in interest rates.
Thus, they recommend investors maintain the strategy of playing at the short end of the yield curve. Notwithstanding, they expect robust system liquidity to be a significant driver of market activities.
However, the robust liquidity picture is expected thin out over the medium term amid an increase in bond supply. In addition, like in the prior year, we expect continued reliance on the domestic debt market and CBN’s Ways & Means advances in financing the 2023FY budget deficit, as the elevated global yields would make foreign currency borrowings remain expensive in the face of tight global financing conditions. Sequentially, analysts maintain their expectation of an uptick in bond yields over the medium term.

Equities: According to the analysts statement the domestic stock market has remained broadly upbeat since the last MPC meeting in January with domestic investors remaining dominant players (87.2% market share as of January 2023).

Furthermore, the ASI Year-to-date return is currently at +7.1% (as of 21 March) following positive reactions to the broadly decent earnings delivered by companies during the 2022FY earnings season. Analysts believe the outcome of the MPC, could trigger a realignment of portfolios towards fixed-income instruments if there is a passthrough impact on yields in the FI market. As a result, analysts expect cautious trading from domestic investors in the short term, showing a weak appetite for stocks. With the MPC meeting out of the way, we believe developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse in the near term.

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