By Eromosele Abiodun

The decisions by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to raise the Monetary Policy Rate (MPR) by 50 basis points from 8.75 per cent to 9.25 per cent will result to a drop in bond prices as yields go up, experts in the nation’s financial sector has said.

Analysts at FSDH Securities Limited who made this submission at their weekly review of the economy and the financial sector, said the rise in bond yield will be felt especially on the long tenored bonds.

FSDH further stated that the rates hike will lead to demand for higher discount rates on treasury bills by investors; increase in lending rates to corporate & Small and Medium Enterprises (SMEs).

The rates hike they added will create additional disincentive for banks to create risky assets as they can place idle funds with CBN to earn 7.25 per cent.

“It may attract hot money into the Nigerian economy with its destabilizing impact in the foreign exchange market; may lead to higher inflation, and may prolong the current woes in the equities market, ”the experts said.

FSDH had before the rate hike anticipated that the MPC would maintain the MPR at 8.75 per cent while using the Open Market Operation (OMO) to manage the temporary liquidity challenge in the market.

“Our review of inflationary tendency shows that inflation rate should remain close to single digit until September, 2011 as anticipated earlier, and thereafter climb up and to close the year in the region of 12 per cent. We maintain that double digit inflation rate in Nigeria is caused majorly by structural problems in the economy.

“Some of which are production rigidities and over-dependence on imported goods, these problems cannot be addressed by raising rates. Under the current circumstances in Nigeria, raising of the anchor interest rate may not bring inflation rate down but lead to cost push inflation, “it stated.

Meanwhile, the Over-the Counter (OTC) bond market of the Nigerian Stock Exchange (NSE) responded to the rates hike last week as it recorded a turnover of 143.52 million units worth N138.23 billion executed in 894 deals, in contrast to a total of 174.07 million units valued at N163.96 billion exchanged in 890 deals the previous week.

The most active bond (measured by turnover volume) was the 8th Federal Government of Nigeria (FGN) bond 2014 Series 1 with a traded volume of 48.45 million units valued at N49.26 billion in 349 deals.

This was followed by the 10.70 per cent FGN May 2018 (5th FGN BOND 2018 Series 2) with a traded volume of 32.4 million units valued at N32.30 billion in 180 deals. Fifteen (15) of the available twenty-eight (28) FGN Bonds were traded during the week compared with nine (9) in the preceding week.

The MPC of the CBN held at the end of its meeting last week appraised the domestic economic conditions during the first eight months of 2011 and the challenges confronting the Nigerian economy against the backdrop of developments in the international economic and financial environment in order to reassess the challenges facing monetary policy for the remaining part of 2011.

At the end of the meeting, the Committee issued a communiqué, which contains its decisions as follows: raise the Monetary Policy Rate (MPR) by 50 basis points from 8.75 per cent to 9.25 per cent; maintain the symmetric corridor of +/- 200 basis points around the MPR, and retain the current Cash Reserve Requirement (CRR) at 4 per cent. The Committee noted that given the difficult and uncertain international environment, it is critical to ensure that the current trends in growth are sustained and price stability is maintained.

The communiqué added that the decision to tighten and raise rates is based on the following: continuing expansionary fiscal stance and high component of recurrent expenditure; liquidity surge expected from Asset Management Corporation of Nigeria (AMCON) intervention following the conclusion of banks recapitalization; sharp rise in month-on-month headline inflation rate despite falling year-on-year inflation rate; need to have positive real interest rates; and reduce persisting demand pressure in the foreign exchange market, driven by significant liquidity injections and reflecting structural deficiencies that have perpetuated the import dependence of the economy.

According to the MPC, provisional data showed that the growth in broad money (M2) stood at 8.55 per cent in the eight months to August 2011, which when annualized translates to a growth rate of 12.82 per cent.

“However, aggregate domestic credit (net) grew by 14.72 per cent in August 2011, compared with December 2010 level. The growth in aggregate credit was mainly due to the increases in credit to the Federal Government, which grew by 18.99 per cent or 28.48 per cent on an annualized basis, close to the indicative benchmark of 29.29 per cent for 2011. Similarly, credit to the private sector grew by 10.88 per cent, which annualized to 16.32 per cent, compared to the benchmark of 23.34 per cent.”

The MPC indicated that with the banking crisis approaching a final resolution with the recapitalization of banks, it expects that banks will increase lending once integration issues are concluded.

Reviewing the external reserves, the Committee noted the modest accretion to the external reserves during the review period. It said the increase was mainly accounted for by increased inflows of royalties into the federation account, reflecting the upward trend in international oil prices and stable oil production in the Niger Delta.

Also, the MPC reported that foreign direct and portfolio investments increased over the last eight months. Foreign capital inflows for the first eight months of 2011 stood at $5.66 billion which is $1.06 billion or 23.04 per cent higher than the $4.60 billion recorded in the corresponding period of 2010.

Source: Thisday