May 25, 2022/United Capital Research
Yesterday, the Monetary Policy Committee (MPC) concluded its 285th meeting, with the chairman announcing the unanimous decision by the committee to change its convention. The MPC for the first time in two and a half years raised the Monetary Policy Rate (MPR) by 150bps bringing it to 13.0% while maintaining Cash Reserve Ratio (CRR) at 27.5%, asymmetric corridor at +100/-700 basis point around the MPR while the Liquidity ratio was retained at 30.0%. This is in line with the hawkish policy stance being adopted by policy authorities in both developed and emerging markets to combat inflation and increase the attractiveness of local securities.
Despite being unsurprising, the committee’s anti-inflationary tilt represents a sharp reversal from the prior pro-growth tone at previous meetings where the primary driver of inflation was believed to be solely structural inefficiencies and supply-side disruptions. Overall, the decision for revert course to a hawkish approach was informed primarily by the need to dampen inflationary pressures to ensure price stability. In addition, the governor highlighted the need to reduce capital outflows from the economy. Furthermore, the surge in money demand particularly as electioneering activities heats up has become a primary concern for the committee, thus justifying the need for a rate hike. Finally, the governor highlighted the accommodative interest rate environment has encouraged aggressive domestic borrowings by the government, raising debt sustainability issues. Thus, the rate hike is expected to moderate government’s domestic borrowing appetite.
Looking ahead, the committee encouraged the CBN to continue using its development finance initiatives to act as a growth catalyst in its priority sectors while sustaining use of unorthodox policy measures such as CRR controls to manage inflationary pressures. We expect the hawkish tone to cause significant disruptions across all asset classes. We see scope for a surge in money market and bond yields in the coming months. In addition, we expect a negative reaction in the equities market as investors selloff equity exposures in response to rising yields. However, we expect companies with solid H1-2022 earnings performance will remain attractive to investors particularly in July. For the next MPC meeting in July, we expect the MPC to revert to a “wait and see” approach to gauge the impact of the recent hike on inflation and other key parameter objectives.
