As predicted in our last weekly macroeconomic note, the Monetary Policy Committee (MPC) of the CBN at the end of its 296th bi-monthly policy meeting today, raised the benchmark policy rate (MPR) by 50bps to 26.75%, marking the fourth increase in 2024.
Surprisingly, the committee also tweaked the asymmetric corridor around the MPR to +500/-100bps from +100/-300bps previously. Meanwhile, other parameters; Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) for deposit money banks were left unchanged at 45.0% and 30.0% respectively.
Regarding the rationale for further policy tightening, the committee expressed optimism that inflation may peak in the near term due to previous tightening measures and reduced external market pressures.
However, the committee was concerned about the increase in the headline rate to 34.2% in June, largely driven by food inflation. Sequel to this, the MPC positively appraised the recent move by the FG to allow for a 150-day imports-free window for selected food items to help temper food inflation.
Our Quick Takes
Firstly, the surprise tweak in the MPR suggests that the CBN is aggressively dissuading banks from tapping liquidity through the Standing Lending Facility (SLF) window. For context, the tweak in the asymmetric corridor to +500/-100bps around the MPR implies that banks seeking to tap funds through the SLF window would have to pay a cost of fund of 31.75% per annum from 27.25% previously. Meanwhile for banks with excess liquidity willing to play at the Standing Deposit Facility (SDF) window would only receive 25.75% interest per annum, thereby expanding the negative spread between SLF and SDF to 600bps from 400bps. Based on our assessment of industry data, banks tapped ₦73.6tn through the SLF window between January and July 2024, representing 8.5x the size of activities at the SDF window. We expect pressure to mount on banks’ ability to balance risk-return going forward.
Secondly, the further hike in the MPR (though arguably compelling) should exert a negative pass-through effect on real sector players, especially in terms of interest expenses on debt funding. Therefore, coupled with the other headwinds such as inflation squeeze and FX volatilities, we expect real output growth to be pressured for the rest of the year.
Thirdly, we have reservations with CBN’s optimism that the 150-day duty-free import window for selected food items would substantially temper food prices. Without the FG addressing the rising cost of logistics fuelled mainly by elevated energy prices and insecurity, the impact of such policy would be short-lived, at best. Furthermore, there has also not been any formal model announced to show how the beneficiaries of the duty-free window would be monitored to sell the staple items at fair prices across the country.
Afrinvest
