July 26, 2023/Cordros Report

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to increase the Monetary Policy Rate (MPR) further by 25bps to 18.75% at its July policy meeting. In addition, the Committee voted to narrow the asymmetric corridor to +100/-300bps around the MPR (previously: +100/-700bps) while leaving other policy parameters unchanged; Cash Reserve Requirement (CRR) at 32.5% and Liquidity ratio at 30.0%. The voting range was narrow among members, suggesting a likely pressure on the Committee to halt their interest rate increases in the near term. Precisely, six members voted for an increase in the MPR, while the remaining five voted to keep the MPR unchanged. Of the six members that voted for an increase, four voted to raise the MPR by 25bps, while two voted for a 50bps hike.

On domestic growth: Although the MPC acknowledge the moderate domestic growth in Q1-23 relative to Q4-22, members attributed the sustained positive performance since exiting the COVID-19-induced recession to the sustained growth in the services and industry sectors, supported by broad-based measures by both the monetary and fiscal authorities. Like the prior meeting, the Committee expects real GDP to continue its moderate recovery over the rest of the year as legacy headwinds linger. Hence, the CBN projects the economy to grow by 2.66% y/y in 2023E (Cordros’ estimate: 2.92% y/y).

On Inflation: The Committee noted the rise in inflationary pressures to 22.79% y/y in June (May: 22.41% y/y), driven by moderate increases in food and core inflation. In addition, members highlighted key factors to stoke upward price pressures in the near term, including (1) upward adjustments to PMS prices in line with market realities and (2) lingering FX reforms. Thus, the Committee called for greater collaboration between the CBN and fiscal authorities to tame rising consumer price pressures.

On foreign exchange: The MPC acknowledged the CBN’s recent policies to boost FX flows, convinced that the policies will increase market transparency and encourage more foreign capital inflows. Therefore, the Committee urged the CBN to leverage its FX policies to boost diaspora remittances, helping to moderate exchange rate pressures.

Cordros’ View
 
The MPC’s decision to embark on a smaller 25bps MPR increase at this meeting did not align with our base case expectation of a HOLD decision to allow previous rate hikes to filter through the real economy. Notably, the Committee highlighted that its critical considerations at the meeting were to either keep the MPR steady or continue increasing it to tame the rise in consumer prices. However, the MPC opted for a moderate increase in the key policy rate to (1) sustain its efforts at anchoring inflation expectations, (2) narrow the negative real interest rate gap, and (3) improve investors’ confidence. Elsewhere, while we acknowledge that the purpose of reducing the asymmetric corridor around the MPR is to incentivise banks to deposit more with the CBN and reduce banking system liquidity, we understand that NGN2.00 billion is the current maximum amount the banks can place with the CBN on an overnight basis. Accordingly, this limit serves as a downside risk to the effectiveness of using the asymmetric corridor to reduce banking system liquidity. Thus, we expect the CBN to follow up with circulars in the coming days to increase the limit on the SDF. On FX, the Committee’s tone suggests that the CBN hopes to rely more on diaspora remittances to boost FX inflows even as the country awaits foreign capital to improve due to the sharp depreciation that accompanied the CBN’s recent FX liberalisation. Consequently, we anticipate FX pressures to remain in the near term as diaspora remittances may not be sufficient to support FX supply. That said, the acting CBN governor guided that in line with its role, the CBN will continue to intervene and keep the FX market at a reasonably stable level the apex bank believes it should be at.
 
In shaping our expectations over the rest of the year, we take our cues from the voting pattern at this meeting and the acting CBN governor’s stance on using other policy options available to the CBN other than the MPR to tame liquidity surfeit in the economy. On the voting pattern, we note that more members voted for a HOLD decision than in previous meetings since the CBN started its monetary policy tightening cycle in May 2022. Besides, most of those that voted for an increase in the MPR went for a 25bps hike, suggesting more pressure on members to halt further interest rate increases. In addition to our global interest rate expectations, the preceding informs our belief that the MPC will likely keep the MPR unchanged at its next meeting on 25 and 26 September.

Market Impact
 
Fixed Income: In the past few weeks, bullish sentiments have dominated the fixed income market amid the structurally buoyant system liquidity. We expect the financial system liquidity profile to remain healthy in the near term, partly driven by increased FAAC inflows. With our expectation that the MPC is at the end of its monetary policy tightening cycle, risk appetite for mid to long-dated bonds is likely to improve. Nonetheless, we maintain our expectations that yields in the fixed-income market are still bound to rise further from current levels. Our prognosis is hinged on our expectation of a sustained imbalance in the supply and demand dynamics, more so that the FGN’s 2023FY borrowing needs remain high. However, we highlight that deliberate actions by the DMO to keep the borrowing costs at a moderate level and a possible maturity of CBN special bills present as downside factors.  

Equities: Following the recent decision of the MPC, we do not expect a significant alteration in the market’s trading pattern, especially as the hike coincides with the commencement of the HY-23 earnings season. Thus, we see scope for the market to sustain its bullish momentum in the short term as we believe the full swing of the HY-23 earnings season will dictate market sentiments as investors hunt for bargains in fundamentally sound stocks with a consistent history of interim dividend payments. Notwithstanding, we envisage intense selling pressures on stocks of companies that underperform in H1-23. Subsequently, as domestic investors remain the dominant players in the market (88.8% market share as of June 2023), we believe sensitivity to an uptick in FI yields will remain a downside to market performance in the medium term. All said, we expect sentiments in the bourse to remain broadly positive until FI yields begin to inch up.