September 28, 2022/United Capital Research
Yesterday, the Monetary Policy Committee (MPC) concluded its penultimate meeting of the year 2022. In line with our expectations, the chairman announced the unanimous decision by the committee to continue combatting inflation. The MPC decided to further increase the Monetary Policy Rate (MPR) by 150bps, bringing it to 15.5%, with ten (10) members deciding to rein inflation by increasing MPR by 150bps. The MPC also voted to raise Cash Reserve Ratio (CRR) to 32.5% from 27.5%. The MPC retained the Asymmetric corridor at +100/-700 basis point around the MPR while retaining the liquidity ratio at 30.0%.
The 150bps hike puts the total cumulative hikes in 2022 to 400bps, bringing the benchmark interest rate to the highest level since the CBN adopted the Monetary Policy Rate (MRR) in Dec-2006. At the meeting, the governor highlighted that a HOLD or LOOSEN policy was not considered, as a LOOSEN policy would have exacerbated further pressures on exchange rate speculation. The committee also believed that a LOOSEN or HOLD stance was off the table following increased monetary policy normalisation globally and the need to attract further investment inflows from FPIs. Lastly, given persistent inflationary pressures domestically and globally, the committee felt a HOLD and loosening policy would be ineffective in reining inflationary pressures. On the HIKE decision, the Governor explained the committee’s decision as a measure to curtail inflation which it fears would constrain economic growth (CPI at 19.6% in Jul-2022 and 20.52% y/y in Aug-2022). A HIKE stance is also in line with the hawkish stance of Central Banks globally in a bid to combat inflation and retain Foreign Portfolio Investment (FPI). The Committee expects this decision and the additional CRR hike to consolidate the impact of the previous two rate hikes to mop up excess liquidity. Lastly, the committee believes that a rate hike would rein in the negative interest rate gap within the system.
Looking ahead, the MPC pledged to continue to hike rates if persistent inflationary pressures persist. It remains to see how much the increased monetary policy will have on inflationary pressures, given that inflationary pressures have been largely cost-push. Following the hike, we expect significant disruptions across all asset classes. For the fixed income markets, we expect an uptick in the yield environment and an uptick in fixed income instruments. We expect this monetary tightening to hurt access to domestic credit for the real sector. For the equities, we expect the twin hike to further fuel the bear market as investors reallocate funds to the fixed income markets.
