September 24, 2024/Cordros Report

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously voted to raise the MPR further by 50bps to 27.25% at its September policy meeting – making it the fifth consecutive increase in the year. The decision to tighten further was based on the need to (1) strengthen the recent disinflationary trend and manage inflation expectations given the upside risks to inflation, (2) stabilise the naira, and (3) narrow the negative real rate of return. At the same time, the Committee voted to raise the Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks to 50.0% (previous: 45.0%) and 16.0% (previous: 14.0%), respectively, while retaining other parameters – the asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30.0%.

On Domestic Growth: The MPC acknowledged the improved GDP growth in Q2-24 (3.19% y/y vs Q1-24: 2.98% y/y), driven primarily by solid growth in the oil and non-oil sectors. Notably, the Committee reviewed its GDP forecast downward marginally to 3.32% for 2024E (Previous: 3.38%) but remains above the IMF growth projection of 3.10%. 

On Inflation: The Committee noted the disinflation trend in the headline inflation in recent months, specifically in July (-80bps to 33.40% y/y) and August (-125bps to 32.15% y/y), due to the moderation in food prices, but highlighted the continued increase in core inflation. The Committee also highlighted the upside risk to inflation in the near term, including increased flooding, insecurity in food-producing areas, and the hike in PMS prices. Nonetheless, the MPC acknowledged the federal government’s efforts to improve food supplies through the duty-free import window for food commodities. Additionally, the Committee was optimistic that the domestic supply of refined petroleum products from the Dangote Refinery could potentially moderate transportation costs and its passthrough effect on food prices in the short to medium term.

On Foreign Exchange: The MPC pointed out the unabating demand pressure in the FX market and the recent efforts of the CBN to stabilise the naira. Furthermore, the Committee highlighted the positive impact of the Dangote Refinery, which potentially reduces FX demand for fuel imports and supports the overall balance of payment. The committee also noted the sustained accretion in the FX reserves in the near-recent weeks.

Cordros’ View

Prior to the MPC meeting, we anticipated that the MPC would keep the policy rate at the current level following the consecutive decline in headline inflation over the last two months. We also highlighted that the intensification of global monetary easing could reduce the need for defensive rate hikes by the MPC, thus supporting a pause in the tightening cycle. However, the MPC unanimously voted to raise the MPR further by 50bps to 27.25% on the back of the elevated inflationary pressures evidenced in the sustained increase in core inflation despite the decline in food prices. The Committee also noted the sustained money supply growth and the unabating demand pressure in the FX market, which has supported the volatility of the naira. Specifically, the Committee highlighted the strong correlation between FAAC releases and liquidity levels in the banking system, as well as the corresponding impact on the exchange rate. This supported the further tightening of monetary conditions in a bid to mitigate the negative effect of FAAC releases on the stability of the exchange rate while supporting price stability. Precisely, the MPC voted to raise the CRR for Deposit Money Banks to 50.0% (previous: 45.0%) and 16.0% (previous: 14.0%), respectively. Meanwhile, the Committee retained other parameters, including the asymmetric corridor around the MPR (+500bps/-100bp) and the liquidity ratio (30.0%).

The Committee noted the global trend towards monetary easing, which is expected to loosen global financial conditions and possibly reduce downside risk to global growth. The Committee also expect global inflation to continue to moderate but will remain above banks’ target levels, underpinning a cautious approach to lowering interest rates. Similarly, we expect the Federal Reserve in the US, the ECB, and the BoE to implement further rate cuts before the year ends as inflationary pressures ease and data points converge towards target levels.

Domestically, as stated in our August CPI report, we foresee the recent increase in PMS prices exerting upward pressure on inflation in the near term, potentially offsetting the usual deflationary effects of the harvest period. This inflationary outlook may prompt the MPC to implement further rate hikes, given its commitment to ensure price stability. As a result, we expect a 50bps increase in the MPR at the next meeting scheduled for 25-26 November.

Market Impact
 
Fixed Income: The decline in stop rates at the recent NTB and bond auctions indicates that the market may not have fully adjusted to the last hike in the Monetary Policy Rate (MPR), leading investors to seek to lock in existing yields before any potential upward adjustments. While we anticipate that the outcome of this meeting will generate further bearish sentiment across the mid-to-long end of the yield curve, tomorrow’s NTB auction should provide clearer insights into the direction of yields in the secondary market. Overall, we expect moderate increases in bond yields; however, this reaction may be muted due to the weak transmission of interest rate changes to fixed income yields observed recently. As we approach the next MPC meeting, investors are likely to start factoring in another potential rate hike, particularly given the mildly hawkish tone expressed by the CBN Governor during this meeting.

Equities: Since the July MPC meeting, domestic investors have limited participation in the market due to elevated fixed income yields, even as they remain the dominant players in the market (84.9% as of August 2024). Consequently, the All-Share Index year-to-date return has declined to +31.8% (July: +34.4%) as of 24 September. Following the MPC meeting, we expect the hawkish tone to further amplify risk-off sentiment in the domestic market. However, we do not anticipate significant shifts in trading patterns, as investors maintain a cautious approach and a limited appetite for stocks. As such, we believe investors will continue to rotate into sectors less affected by higher rates, such as financials (banks), which benefit from increased margins on loans as interest rates rise. Additionally, any price dip in strong-performing stocks could offer attractive buying opportunities as the current rate-tightening cycle may be approaching its peak. Therefore, we expect investors to closely monitor subsequent Treasury bills and bond auctions to gauge the movement of yields in the fixed-income market.