January 26, 2023/CSL Research

• The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the Monetary Policy Rate (MPR) by 100bps to 17.5% from 16.5% at the end of its first Monetary Policy Committee (MPC) meeting for the year 2022.
• The MPC decided to retain all other parameters, with the asymmetric corridor of +100/-700 basis points around the MPR, the CRR at 32.5%, and the Liquidity Ratio at 30%.

• We retain our view that the continuous hike in rate will likely constrain the country’s fragile growth while having a minimal effect on inflation and attracting foreign inflows.
  

At the end of the first Monetary Policy Committee (MPC) meeting yesterday afternoon, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the MPR for the fifth consecutive time to 17.5% from 16.5% previously. The CBN Governor noted that the decision to continue its contractionary monetary policy approach is predicated on the need to sustain the decline in the headline inflation rate, which was down 12bps to 21.34% in December 2022 from 21.47% in November 2022. The committee noted that loosening its monetary policy stance was not considered because loosening under a double-digit inflationary condition will be tantamount to an immediate reversal of the expected further downward trend in inflation. The Committee was reluctant to adopt the hold option because a hold option would signal the MPC’s quick adjustment of its policy stance due to a one-time marginal decline in inflation.

Interbank versus MPR

Source: CBN, CSL Research

Inflation: Inflation continues to play a major part in the decision of the MPC to retain its aggressive approach. Despite noting that inflation (year-on-year) has started to moderate, the committee was not convinced that a marginal 13 basis points dip in inflation was strong enough to elicit a policy reversal. The committee noted that Nigeria’s inflation above 20% is already a threat to growth and is among the highest in the world.  Nigeria’s headline inflation rate inflation recorded its first moderation in December 2022, with headline inflation (year-on-year) declining to 21.34% in December 2022 from 21.47% in November 2022 and this was driven by a decline in food inflation (-39bps), however core inflation advanced by (+25bps). On a month-month basis, headline inflation increased to 1.71% in December 2022 from 1.39%  in the preceding month, due to a rise in consumer spending during the festive period. The Committee welcomed the recent deceleration in year-on-year headline inflation, noting that the persistence in policy rate hikes over the last few meetings has started to yield the expected decline in inflation and it is important to sustain the momentum, hence the further hike in MPR. The CBN continues to expect a surge in money supply as the forthcoming 2023 general elections draw closer. In our view, we believe that any further aggressive rate hikes will hamper growth. With the further hike in MPR coupled with the current Naira redesign embarked on by the CBN to curb the money outside the banking system, we expect the moderation in headline inflation to persist in the near term. However, we note that the pass-through effect from the hike will continue to be minimal, as supply side factors remain the driving force of the current inflation numbers.

Inflation rate (January – December 2022) Source: NBS, CSL Research

Capital flows: The challenge of capital flight has remained a key concern for the committee. The elevated interest rates by global central banks have continued to reinforce flight to safety as foreign portfolio investors shed their investment portfolio in emerging markets and developing economies in favour of safer haven advanced economies. The Nigerian equities market has remained bearish with total foreign portfolio transactions in equity at N14.43bn in November compared to N41.31bn in January 2022. We note, that concerns around foreign exchange stability and liquidity will continue to weigh on foreign portfolio inflows.

 Economic Growth: Nigeria’s Gross Domestic Product (GDP) grew by 2.25% y/y in real terms in the third quarter of 2022, up from 3.54% in Q2 2022. The committee acknowledged the consistent growth in the non-oil sector, particularly telecommunications and agricultural sub-sectors. The CBN also noted the economy has remained on a path of positive growth for eight consecutive quarters and this is driven largely by the support of the Bank and the fiscal authority in growth enhancing sectors. The committee forecasts that output growth recovery is expected to continue reasonably in 2023, given the expected sustained positive performance in the fourth quarter of 2022 and a steady rebound in economic activities. We reiterate our position that the aggressive rate hikes will likely hamper the country’s growth negatively in the long run while having a minimal effect in combating inflation and attracting foreign inflows. 

Stock Market: The equities market has reacted negatively to the previous hikes in MPR but showed a positive reaction to the last MPR hike. We do not expect a negative reaction to the latest hike, as positive corporate actions and announcements, especially on the heavily weighted stocks that can boost investors’ sentiments are expected to start trickling in. As we approach the earnings season, we expect the equities market to remain mildly bullish as investors take position in dividend paying stocks.

Conclusion:  Despite a cumulative 500bps rate hike in 2022, we expect the CBN to retain its aggressive stance in the short term, albeit at a slower rate compared to last year, while keeping the rate constant in the second half of the year.