July 22, 2022/United Capital Research
Post-MPC: MPR hiked 100bps to print at 14.0%
Yesterday, the Monetary Policy Committee (MPC) concluded its 286th meeting, with the chairman announcing the unanimous decision by the committee to continue combatting inflation. The MPC decided to further increase the Monetary Policy Rate (MPR) by 100bps, bringing it to 14.0% while maintaining Cash Reserve Ratio (CRR) at 27.5%, the Asymmetric corridor at +100/-700 basis point around the MPR, and the Liquidity ratio was retained at 30.0%. The most recent hike is in line with central banks’ global hawkish policy stance to combat inflation and increase the attractiveness of local securities.
In the case for tightening, the governor highlighted the continued effort of the fiscal and monetary authorities to dampen price pressures. The committee underscored that inflationary pressures were driven by demand and supply factors. On the monetary side, the governor noted the banks need to halt the rise in money supply to tackle demand-pull aspects. The MPC also stated that a tightening would lead to a higher cost of financing, which would further reduce manufacturing output. A decision not to tighten would lead to inflationary pressures, erasing gains made in a fragile recovery after the recession in 2020. On easing, the MPC felt that reducing rates would lead to additional inflationary pressures and increased FX speculation whilst dampening the money market rate needed to encourage savings. The MPC felt that a HOLD decision would be insufficient to tackle the rising money supply amid rising inflationary pressures.
Looking ahead, we expect the continued hawkish tone to cause significant disruptions across all asset classes. We foresee a surge in the money market and bond yields as more investors demand higher returns on fixed-income instruments. For equities, we also expect an adverse reaction in the equities market, as investors sell off equity exposures, shifting to higher-yielding risk-free assets. However, investors would continue cherry-picking companies with solid H1-2022 earnings performance. For the next MPC meeting in September, we expect the MPC decision will largely fall on the stance taken by more advanced central banks in their aggressive rate cycle. Domestic inflation estimates will also be a significant consideration at the September MPC meeting.
