Focus of the week: MPC raises MPR further, reverses corridor rate adjustments

In the second meeting of the year, the Cardoso-led Monetary Policy Committee (MPC) raised the Monetary Policy Rate by 200bps to 24.75% and adjusted the asymmetric corridor around the MPR to +100/-300bps. While the Cash Reserve Ratio (CRR) for commercial banks was left unchanged at 45%, the Committee raised the CRR of merchant banks from 10% to 14%.

Faced with the option to hike or hold, the Committee decided to progress with a rate hike considering the elevated global interest rate environment, the sustained uptick in inflation, and stable growth expectations for the Nigerian economy. The Committee’s decision to tighten was premised on the need to anchor inflation expectations and ensure exchange rate stability.

Given the surprise spike in February inflation numbers, the bank was expected to tighten. However, the lag in monetary policy transmission necessitated the need for a milder hike, thus making the 200bps adjustment (which is half as much as the previous hike), just right. Although the Committee noted that the drivers of inflation were largely structural, the Committee called for the fiscal authorities to step up agricultural policies to improve food supply and maintained its resolve to tighten.

CBN raises SDF rate effectively by 600bps to 21.75%

In our February note, we highlighted that the decision to adjust the Standing Deposit Facility (SDF) window neutralized the impact of the hike on the earning capacity of banks at the window, thereby preventing the full transmission effect of the hike. In this meeting, the Central banks reversed that adjustment as banks will now earn 21.75% on funds parked at the window, which is 600bps above the preceding stagnant 8-month rate of 15.75%. Our empirical analysis reveals that a unit increase in the SDF rate had a positive and significant impact on average treasury bill rates. While the average Nigerian Treasury Bill (NTB) rate remained slightly above the mid-teens over the past two months, we expect a further uptick in NTB stop rates towards the late teens and early twenties over the near term.

CBN extends tightening measures to merchant banks

The Central Bank, while retaining a sky-high CRR of 45% for commercial banks raised the CRR of merchant banks by 400bps to 14%. In July 2023, the Central Bank, in a circular to merchant banks, reduced the CRR limit for merchant banks from 32.5% to 10.0% to support long-term financing towards the development of the Nigerian economy. However, the apex bank had to raise the limit slightly to consolidate its hawkish moves thus far, while giving room for more fund flows towards medium-term project financing.

Monetary outlook: Price surge could call for additional rate hikes

On March 20 – 21st, the Cardoso-led MPC will hold its second meeting of the year. After delivering a jumbo 400bps rate hike in February, we expect the Committee to retain its hawkish renditions as inflation surges beyond 30%. Already, short-term yields have risen above 20% in recent primary market auctions. This combined with other policies has made volatility in the foreign exchange market recede. Nevertheless, due to the lag in monetary policy transmission, these rate actions may not impact inflation just yet. Thus, we do not rule out further rate hikes, especially as the Bank pivots to inflation targeting. Inflation targeting implies the Central Bank is bent on moderating inflation towards its desired target of 21.4% despite the fluctuations in output growth that could ensue from high and rising interest rates.

What shaped the past week? 

Equities: Following the CBN’s rate hike during the week the local bourse dipped by 0.08% dragged by large-cap stocks such as FBNH (-8.02% w/w), and MTNN (-1.28% w/w).  However, gains in UBA (+3.70% w/w), ZENITHBANK (+11.39% w/w) and GTCO (+7.69% w/w) lifted the banking index by 1.93% w/w.  Similarly, price appreciation in WAPCO (+5.26% w/w) drove the Industrial goods (+0.57% w/w) index higher.

Fixed Income: Owing to coupon and FAAC inflows system liquidity improved this week, however, funding pressure tightened, as the OPR advanced by 107bps to close at 27.29%. Similarly, in the NTBs space, bearish sentiments dominated as the yield on the 182- and 364-day bills advanced by 22bps, and 49bps, WoW, respectively. Meanwhile, in the bond space, muted trading activity dominated as investors remained on the sidelines in anticipation of higher yields following the rate hike in this week’s MPC meeting.

Currency: At the NAFEM, the Naira appreciated by N122.1 w/w to close the week at N1,309.39 per dollar.

Domestic Economy:

In the second meeting of the year, the Cardoso-led Monetary Policy Committee (MPC) raised the Monetary Policy Rate by 200bps to 24.75%, the Standing Deposit Facility Rate by 600bps to 21.75%, and the Cash Reserve Ratio of merchant banks by 400bps to 14%. The Committee’s decision to tighten was premised on the need to anchor inflation expectations and ensure exchange rate stability. Its hawkish decision has improved the carry trade for Naira fixed income assets, attracted foreign portfolio inflows, and supported broad efforts to stem the Naira’s slide. Following the upward adjustment in the SDF rate, we empirically confirmed that a unit increase in the SDF rate has a positive and significant impact on average treasury bill rates. Although the average Nigerian Treasury Bill (NTB) rate remained slightly above the mid-teens over the past two months, we expect a further uptick in the average NTB stop rates towards the late teens and early twenties over the near term.

Global: This week, global markets painted a positive picture, with major indexes reaching new highs. The key driver? The Federal Reserve’s continued dovish signals. Investors cheered the prospect of three interest rate cuts later in the year, a move seen as supportive of economic growth and corporate earnings. The S&P 500 inched higher by 0.27% WoW.

Elsewhere, European markets displayed cautious optimism this week, mirroring global trends but with a dose of regional nuance. While buoyed by the dovish signals from the Federal Reserve in the US, European investors remain watchful of upcoming central bank decisions closer to home.

News of potential rate cuts from the Fed buoyed investor sentiment across Asia.  This, coupled with a weaker yen, propelled the Japanese markets to record highs. The Nikkei 225 and TOPIX soared over 5%, a welcome sign after months of relative stagnation.

What will shape markets in the coming week?

Equity market: The short trading week ended on a negative note, albeit marginally, as demand in the banking sector helped boost market performance. We expect a cautious start next week Tuesday, as investors reevaluate their investment decisions.

Fixed Income: In the next trading session, we expect liquidity levels to determine the direction of the NTBs market. Meanwhile, in the bond space, we expect investors to remain on the sidelines in anticipation of higher yields.