The Monetary Policy Committee (MPC), in its third meeting of the year, voted to raise the Monetary Policy Rate (MPR) for the third consecutive time by 150bps to 26.25% in May. Notably, the Committee deliberated on either tightening its monetary policy further or holding the MPR steady to assess the impact of previous rate increases. The MPC’s decision to further tighten its monetary policy was driven by its near-term inflation outlook, acknowledging the persistently elevated inflation risks and the necessity to consolidate the gains from previous rate hikes. Meanwhile, the MPC kept other parameters unchanged: the asymmetric corridor around the MPR at +100bps/-300bps, the Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) at 45.0%, and the liquidity ratio at 30.0%.
On Domestic Growth: The MPC remained optimistic about GDP growth despite heightened inflationary pressures and tight monetary conditions, as evidenced by the improvement in the Composite PMI numbers. The Committee upheld its GDP forecast of 3.38% for 2024, slightly above the revised IMF forecast of 3.30% but below the Federal Government’s projection of 3.88%. However, the MPC highlighted potential downside risks to growth, including tight monetary conditions and disruptions to the global supply chain resulting from ongoing geopolitical tensions and global fragmentation.
On Inflation: The Monetary Policy Committee (MPC) noted that inflationary pressures remained elevated in April, mainly attributable to exchange rate pass-through, high logistics costs, and food shortages induced by heightened insecurity in the food-belt region. However, the MPC acknowledged the moderation in month-on-month headline inflation numbers and attributed it to the impact of its monetary policy tightening on consumer prices. The Committee expects inflationary pressures to remain high in the near term, indicating that inflation risks are elevated.
On Foreign Exchange: The Committee highlighted the naira’s volatility, attributing it to seasonal demand, a characteristic of a market-driven FX market. Furthermore, the Committee noted the marginal increase in FX reserves while urging the CBN to sustain its focus on increasing its FX reserves. The Committee praised the recent decision by the CBN to grant licenses to fourteen International Money Transfer Operators (IMTOs), anticipating that this move would enhance competition within the sector and facilitate remittances through official channels.
Cordros’ View
In our previous note, we pointed out that the MPC will tighten its monetary policy rate further despite the moderation in price increases primarily due to high inflation risks emanating from the depreciation of the naira and the inflationary impact of a potential review of the minimum wage by the Federal Government (FG). However, we anticipated slower increase, given the moderation in the month-on-month inflation numbers and the DMO’s reluctance to increase the yields on Treasury bonds due to its impact on the FG’s debt service burden. Whilst our direction of a further tightening of the monetary policy was on point, the Committee voted to raise the MPR to 26.25%, representing a 150bps increase (Cordros expectation: +100bps), whilst maintaining other parameters constant. We highlight that the higher-than-expected increase in the MPR indicates the Committee’s unrelenting desire to drive inflation downwards to bearable levels.
Furthermore, the Committee emphasised that developments in the global economy continue to pose an upside risk to price stability. The MPC recognised that central banks in Advanced Economies have maintained elevated interest rates despite declining consumer prices, primarily due to persistent high inflation risks, constraining their ability to lower interest rates. The Committee also noted that prolonged geopolitical tensions continue to pose an upside risk to global commodity prices, potentially fueling inflationary pressures in the domestic economy. Nonetheless, the Committee pointed out that whilst they expect global inflation to continue moderating, it will remain significantly above the target set by the global Central Banks. Whilst the MPC’s view on a sustained disinflationary trend aligns with ours, we think that the decline in inflation will trend towards set targets, particularly in the Euro area and in the UK, which could strengthen the European Central Bank and the Bank of England’s confidence to initiate rate cuts early in the second half of the year. On the other hand, we think inflation will remain sticky in the US, prompting the Federal Reserve to maintain high interest rates for an extended period. We anticipate that the Fed may consider loosening its monetary policy towards the end of the third quarter of 2024 as inflation approaches the Fed’s target of 2%.
Domestically, we anticipate consumer prices to remain sticky upwards, primarily due to the exchange rate pass-through effect following the depreciation of the naira. We also anticipate a decline in food supplies, primarily due to the faster depletion of the off-season harvests, which could potentially drive up food prices. However, we expect the inflation numbers to peak in June whilst the disinflationary process sets in in July, primarily supported by a higher statistical base in the corresponding period of last year. Consequently, we expect the MPC to tighten its monetary policy further in its next meeting in July. However, we anticipate a slower pace of increase given its expectation of moderation in consumer prices in the second half of the year. Accordingly, we expect the Committee to raise the MPR further by 100bps in its next MPC meeting slated for 22 and 23 July 2024.
Market Impact
Fixed Income: While we believe the outcome of this meeting may trigger further rounds of bearish sentiments across the mid-to-long end of the yield curve, we expect tomorrow’s NTB auction to give more clarity on the direction of yields in the secondary market. Moreover, given our expectations of a continued increase in interest rates, we advise investors to remain cautious about investing in long-duration instruments, which currently may not offer fair compensation for the risks of rising rates. Thus, we maintain our expectations that yields in the fixed-income market are bound to increase further from current levels. Our prognosis is further buoyed by the expectation of a sustained imbalance in the supply and demand dynamics in the fixed-income market.
Equities: Since the March MPC meeting, domestic investors have sold down their portfolios in response to an increased sensitivity to rising FI yields whilst remaining dominant players (82.5% as of March 2024). Thus, the ASI Year-to-date return is currently at +31.4% (March: 39.0%) as of 21 May. Given the outcome of the MPC meeting, we believe the hawkish tone will continue to intensify risk-off sentiments in the domestic bourse. However, we do not anticipate significant changes in the trading pattern as investors continue to trade cautiously with a weak appetite for stocks. Therefore, we expect investors to continue cherry-picking stocks while closely monitoring subsequent Treasury bills and bond auctions to gauge the movement of yields in the fixed-income market. Over the medium term, we expect macroeconomic developments and corporate actions to shape the overall direction of the stock market.
