MPC Review: Still hawkish with a 200bps hike in MPR

Olayemi Cardoso, The Governor of the Central Bank of Nigeria (CBN). Image Credit: CBN

March 27, 2024/CSL Research

Once again citing the need to curb inflation and improve FPI flows, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the Monetary Policy Rate (MPR) by 200bps to 24.75% from 22.75% at its 294th meeting and second Monetary Policy Committee (MPC) meeting for the year 2024. Also, the MPC decided to adjust the asymmetric corridor to +100/-300 basis points around the MPR, from +100/-700 bps previously, while raising the Cash Reserve Ratio (CRR) of Merchant Banks to 14% from 10%. The committee however retained the liquidity ratio at 30% and the CRR of Deposit Money Banks (DMBs) at 45%.

We reiterate that the rate hikes will have minimal impact in curbing inflation due to weak monetary pass-through to inflation. However, there are positive signs emerging because of the rate hikes, particularly in the currency market. Following the CBN’s February MPC meeting, there has been a noticeable appreciation and stabilization in the exchange rate between the US dollar and the Naira. This appreciation according to the CBN governor is anticipated to help moderate the adverse effects of high interest rates on households and businesses.

The expected increase in the Cash Reserve Ratio (CRR) of Merchant Banks further confirms the committee’s aim to leave no stone unturned in its tightening drive. The change to the asymmetric corridor also emphasizes CBN’s hawkish stance by encouraging banks to keep deposits while discouraging borrowing. Overall, we see no room for any rate cut this year and forecast a further 100-200bps hike for the remainder of the year.

Yesterday, at the conclusion of the 294th Monetary Policy Committee (MPC) meeting, the MPC decided to increase the Monetary Policy Rate (MPR) by 200 basis points to 24.75% from its previous level of 22.75%. The decision to raise the MPR was driven by the prevailing inflationary and exchange rate pressures, with the aim of promptly restoring purchasing power to the average Nigerian citizen, as highlighted by the CBN Governor.

Inflation: We still expect only a minimal impact.

Inflation continues to play a major consideration in the decision of the MPC to retain its hawkish monetary policy approach. It is interesting to note that there haven’t been any new inflation figures released since the previous hike. Headline inflation rose by 180bps to 31.70% in February 2024 from 29.90% in January 2024. This increase was attributed largely to the continued rise in the food inflation rate to 37.92% in February 2024, from 35.41% in January 2024, and the core component also rose to 25.13% in February 2024, from 23.59% in January 2024.

The committee noted that the major factors driving inflation remain exchange rate pass-through, rising cost of energy, high costs of logistics and distribution of food items, high fiscal deficits, and lingering security challenges in major food-producing areas. Cardoso however reiterated the need for fiscal balance as the monetary policies are meant to rein in inflation in the short term. The committee therefore called for the full implementation of the Federal Government’s agricultural policies and programs to improve food supply and further advised for broader fiscal consolidation.

In our view, apart from the fact that there is a weak monetary pass through to inflation in Nigeria, many of the issues highlighted by the CBN as driving inflation are supply side challenges. The MPC has increased MPR rates by a cumulative 2,020bps since May 2022 when the rate hikes began. On the other hand, the inflation rate has grown from 17.72% in May 2022, to close at 31.70% in February 2024. This compares with a cumulative 475bps fed rate hike since March 2022 which has led to a decline in inflation rate to 3.2% in February 2024 from 8.5% in March 2022.

Capital flows: Slight Improvement expected.

Capital flight remains a significant concern for the committee. The committee acknowledged the CBN’s efforts to offset verified foreign currency obligations, believing the action will greatly boost investor confidence and attract foreign investments to Nigeria. We note that we have seen an improvement in foreign capital inflow into the country, though most of it has been skewed towards the fixed income market due to its increasingly appealing yields though still net negative in real terms. Since the start of the year, about US$2.1 billion worth of Foreign Portfolio Investments (FPI) has been brought into the country, indicating growing confidence in the Nigerian market. Also, there was an uptick in total foreign participation in the equities market, with total foreign portfolio investments increasing by 23.91% from N53.11billion (about US$39.13million) to N65.81billion (about US$39.13million) between January and February. That said, we maintain our view that there needs to be sustainable stability in the Nigerian FX market before we see significant inflow of funds into the country.

Economic Growth- The strengthening Naira to minimise shocks.

In the fourth quarter of 2023, Nigeria’s real Gross Domestic Product (GDP) saw a growth of 3.46%, compared to 2.54% in the previous quarter (Q3 2023), indicating a perceived trajectory of economic recovery. Notable reforms implemented by the Central Bank of Nigeria (CBN) seem to be yielding early results, as evidenced by the strengthening of the Naira against the USD in recent days. However, challenges persist, particularly in the manufacturing sector. The devaluation of the Naira and the rise in interest rates are expected to further strain this sector in 2024. Despite this, Cardoso has highlighted the potential mitigating effect of the strengthening Naira on the impact of high interest rates.

It’s worth noting that approximately 60.0% of companies listed on the NGX30 have significant foreign exchange (FX) needs, either for imports or servicing foreign debt. The Fast-Moving Consumer Goods (FMCGs) sector, which comprises over half of the manufacturing sector, faced significant challenges in 2023, with many listed companies experiencing negative equity positions following the Naira devaluation. Though a strengthening of the currency bodes well for manufacturers as it will minimize expected FX losses in 2024, we still believe the high interest rates will hinder growth prospects.

Increase in Merchant Bank CRR: The anticipated increase in the Cash Reserve Ratio (CRR) of Merchant Banks further confirms the committee’s aim to leave no stone unturned in its tightening drive. We expect that the increase of 400bps will have a marginal effect on the overall liquidity in the economy as merchant banks don’t control a significant portion of deposits when compared to commercial banks. However, the impact on the affected banks will be negative as more funds that should be earning interest will be sterilized.

Adjusting the asymmetric corridor to +100/-300 basis points around the MPR: The upper limit of +100 basis points indicates the interest rate at which banks can access funds from the central bank window (in effect MPR+ 100bps, which is 25.75% compared with 23.75% previously) while the lower limit of -300 basis points represents the rate at which excess reserves are remunerated, implying banks can earn 21.75% on excess reserves with CBN compared with 15.75% previously. The change to the asymmetric corridor emphasizes CBN’s hawkish stance by encouraging banks to keep deposits while discouraging borrowing.

Stock Market- Again, negative but corporate actions/gradual improvement in FPI participation should support stock market activities in the near term.

The fixed-income market is gaining appeal as yields are on the rise. Consequently, more investors may shift away from equities towards the more attractive fixed-income options. However, positive corporate actions and disclosures, particularly from major banks will likely support bullish sentiments in the near term. Again, we are beginning to see some improvement in FPI participation, albeit minimal, and we believe this may further support market activities.

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