September 22, 2020/Cordros Report
Against market expectations, the Monetary Policy Committee (MPC), faced with the choice of reducing or leaving policy parameters unchanged, elected to:
- Reduce the Monetary Policy Rate (MPR) by 100bps to 11.5%;
- Widen the Asymmetric corridor around the MPR to +100/-700bps;
- Retain the Cash Reserve Ratio (CRR) at 27.5%; and
- Retain the Liquidity Ratio (LR) at 30.0%.
The decision marks the second rate cut in 2020 and brings the MPR to its lowest level since February 2016; the change to the asymmetric corridor is the first since March 2016. Of the ten committee members, six voted to cut rate by 100bps, one voted for a 50bps rate cut, while three voted to maintain the rate. While all members voted to retain the CRR and LR at their current levels, 9 members voted to change the Asymmetric corridor around the MPR while 1 member voted to leave it unchanged.
Focus Areas: The key focus areas of the Committee’s consideration were declining domestic output and upward pressure on domestic prices.
On domestic growth: The Committee highlighted the negative growth rate experienced by the country in Q2-20 presented a policy dilemma and projected that the economy may continue to grapple with the effects of the pandemic throughout the rest of the year. The Committee, however, expects the economy to enter into a positive growth territory between Q4-20 and Q1-21 based on the anticipated positive results from the coordinated and sustained interventions by the Federal Government (FG) and the Central Bank of Nigeria (CBN).
On Inflation: The Committee expressed that the current inflationary pressure is not due to monetary factors, rather, it reflects the impact of structural rigidities and supply chain challenges. Hence, traditional tools may not help address inflationary pressure. Instead, it will continue to favour supply-side measures to stimulate aggregate domestic production which will lower prices.
On private sector credit: The Committee expressed confidence in the strength of the banking sector despite the persistence of the COVID-19 pandemic. It also expressed satisfaction in the growth of credit to the private sector and urged the banks to do more. The Committee also highlighted the decline in the NPLs to 6.1% as at the end of August 2020 compared to 9.4% in the corresponding period of 2019 due to recoveries and write-offs.
Interventions: The Committee supports coordinated interventions of the CBN and FG towards the manufacturing, health, solar power, construction and agricultural sectors. Specifically, the Committee noted that so far, total disbursements have amounted to NGN3.50 trillion including COVID-19 targeted funds of NGN73.65 billion, disbursement to the Agriculture and SME fund of NGN64.6 billion, NGN24.47 billion to the healthcare sector, and NGN2.13 billion to the creative industry which has set the economy towards the path of recovery. The committee also noted that the CBN has so far extended NGN1.80 trillion of NGN2.30 trillion needed for the 1-Year Economic Sustainability Plan (NESP) – developed by the Economic Sustainability Committee (ESC) – through its channels of participatory financial institutions.
Comment: Combined with the recent decision to lower the savings deposit rate, the rate cut firmly establishes the CBN’s dovish stance, with output growth as the priority, and all but pushes any focus on inflation to the sidelines. Though lower rates are intended to compel banks to extend more credit to the real sector, we note that banks concerns will still lie around asset quality and systemic risk. Consequently, we do not expect any significant growth in domestic credit or aggregate demand, especially given the historical ineffectiveness of the MPR in stimulating output and also the negative impact of the pandemic on household income. We also note that the CBN did not address the issue of the exchange rate, and forex illiquidity, which in our view, are major hindrances to any meaningful economic recovery.
Market Impact: The fixed income market is likely to see a downward adjustment in yields as a consequence, making the equities market even more attractive and worth a second look.
