In tandem with our expectation, the Monetary Policy Committee (MPC) raised the benchmark interest rate by 50bps to 26.75% on Tuesday, – fourth consecutive hike this year (YTD cumulative increase 800bps). Additionally, the MPC adjusted the asymmetric corridor around the MPR to +500 / -100bps, from +100 / -300bps. Meanwhile, the Cash Reserve Ratio was held constant (Deposits Money Banks: 45.0%; Merchant Banks: 14.0%) with the Liquidity Ratio unchanged at 30.0%.
The decision of the CBN’s MPC contrasted its African peers for example, Kenya’s MPC held rate constant at 13.0% in June while South Africa (8.25%) and Egypt (27.75%) maintain status quo in their July meeting. For Nigeria, the decision to hike rate followed an uptrend in Headline inflation, for the 18th consecutive month, to 34.2%.
Although supply pressure on food and energy goods were the main drivers of the continued price pressure, the MPC noted that previous hikes had curbed aggregate demand, hence the need to consolidate on that front by maintaining a hawkish stand. Be that as it may, the limitations of MPR to correct the structural challenges in the food sector, as well as optimism that inflation will peak in the near term, informed their decision for a mild interest rate hike by 50bps.
On the back of this, the Committee acknowledged the FG’s effort on recent measures to address food supply shortages. In particular, the apex bank highlighted the policy to remove import tariff over 150-day period on staple foods (maize, husked brown rice, wheat, and cowpeas) to alleviate food shortages.
Our take is that MPC’s tinkering of the asymmetric corridor to further tighten liquidity conditions should exert pressure on funding cost for banks, both directly (as lenders tap the window) and indirectly (repricing of rates across money market). We note the particular importance of the Standing Lending Facility (SLF) as a support for banks amid liquidity crunch induced by contractionary interest rate policy. For example, between the start of the year and 19th July 2024, banks accessed a total of ₦73.6tn through the SLF, 8.4x inflows to Standing Deposit Facility (SDF). This skewness suggests steep liquidity shortfall within the system, for which lenders must now pay 31.75%p.a to bridge if the SLF must be utilized.
Elsewhere, businesses might continue to strain under the weight of elevated borrowing costs — a necessary evil to starve decades-high inflation. That said, we are of the view that MPR as a tool has its limitations in addressing structural issues, like insecurity and weak availability of infrastructure to support productivity, amongst other things. We note that fiscal policy reforms are necessary to fix some of these issues and the monetary policy side can only do so much. Therefore, we assert that continued rate hike without complementary and decisive fiscal efforts might only increase the burden on businesses without much effect on inflation. Nonetheless, the decision to decelerate pace of tightening indicates awareness of these underlying complexities.
In terms of impact, the increase in MPR is expected to lead to an upward repricing of fixed income instrument, especially short-term assets, ranging from treasury bills to commercial papers which will naturally make these investments more attractive to investors compared to stocks. This trend is evident from the recent treasury bills auction, where the average stop rates across all instruments rose by 172bps to 20.0%.
Additionally, we anticipate an elevated yield in the bonds market, though at a moderate pace. Conversely, pressure on interest expense and profit margins could dull outlook on corporate earnings, leading to subdued equities sentiment — other things equal. This might be a push factor to the fixed income space, while attractive yields pull investors in. In summary, cautious equities trading is advised especially in sectors negatively sensitive to interest rate. However, price moderation could provide good entry opportunities for tickers with strong track record, as interest tightening cycle might peak soon.
Afrinvest
