February 28, 2024/United Capital Research

At the 293rd Monetary Policy Meeting held on the 26th and 27th of February 2024, the first since the 25th July 2023 and MPC meeting by the New CBN governor and the newly constituted MPC Committee, the MPC decided to raise the Monetary Policy Rate (MPR) by 400bps to 22.75%, an all time high,, adjust the asymmetric corridor from +100/-300 to +100/-700, raised CRR from 32.50% to 45.0%, and held the liquidity ratio at 30.0%. This decision marks the MPC’s 8th consecutive increase in MPR since 24-May-2022, amounting to a total cumulative hike of +1,125bps.

Key considerations for the committee was centered on the inflation, exchange rate pressures, projected inflation, and rising inflation expectations.. headline inflation for the month of January stood at 29.9% y/y compared to 21.8% in Jan-2023. This has been driven by an unprecedented rise in money supply , a significant devaluation of the naira and insufficient monetary policy measures by the CBN among other factors.

The decision by the MPC to hike the MPR by 400bps was unprecedented, reiterating the apex banks commitment to clamp-down on inflation and achieve price stability , however this posture by the CBN means the bank has prioritized price stability over output growth.

This will foster slower growth in the real economy given the elevated cost of credit and the toll on consumer spending. Sectors like manufacturing and Trade will bear the brunt of the shocks given their level of sensitivity to the rate environment. On the other hand sector like financial services are expected to thrive under current conditions given the attractive rate environment which presents various opportunities in the fixed income market.

Spread between the MPR and the headline inflation rate has tightened from 1115bps to 715bps meaning we are still a long way from a positive rate of return. This is evident in fixed-income instruments , this coupled with the continued devaluation of the naira due to volatility in the FX market, is unlikely to be attractive for Foreign Portfolio Investors (FPIs).

Nevertheless, we expect yields in the fixed-income market to trend higher given the CBN’s disposition to deploy orthodox monetary policy tools (e.g OMO auction) to mop-up excess liquidity. For the equities market, we expect the bearish sentiments we have observed in recent weeks to persist. This is hinged on the resultant effects of the increase in interest rate on fixed income yields.

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