MPR records biggest increase in 20 years, hits 16.5%

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  • Committee troubled about continued inflationary pressures for ninth consecutive month
  • Analysts foresee heavy spending in festive season, 2023 general elections

BY BAMIDELE FAMOOFO

Uba Group

The Monetary Policy Committee of the Central Bank of Nigeria unanimously has voted to increase the Monetary Policy Rate further by 100bps to 16.5 percent. It was the fourth consecutive rate hike and the highest rate since November 2002 (18.5%).

The hike brings the cumulative interest rate increase in 2022 to 500bps. The last time the MPR was at the 16.5 percent level was in July 2003.

Based on the voting pattern, nine members voted to increase the MPR by 100bps, while the remaining two members voted for a 50bps hike in the MPR. Also, the Committee voted to retain the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5 percent, and Liquidity ratio at 30.0 percent.

In taking the decisions, the MPC noted the consistent positive performance since the exit from the COVID-19-induced recession, driven by the non-oil sector and complemented by continued policy support from the fiscal and monetary authorities. Moreover, the Committee expects continued output growth for the rest of 2022, albeit at a much slower pace than earlier anticipated, in light of the domestic and external shocks to the economy.

The Committee remained concerned about the continued uptick in inflationary pressures for the ninth consecutive month, with the headline inflation settling at 21.09 percent y/y in October. However, the Committee noted the slowdown in the m/m inflation (-11bps to 1.24% m/m as of October), indicating that price pressures are responding to the CBN’s recent interest rate hikes.

Commenting on the MPC’s decision, financial analysts at Cordros Research noted that “the decision to increase the policy rate further by 100bps was in line with our expectation (see report: MPC Could Increase the Monetary Policy Rate Further) given the need to further consolidate the progress made with inflation (domestic inflationary pressures moderated month-on-month for the third consecutive month as of October).”

“Notably, the Committee highlighted that it did not consider the loosening option, given that it would undermine the gains of the last three policy hikes. Accordingly, the options available to it were either holding or further increasing the key policy rate. However, in addition to consolidating previous gains, the Committee opted for a further increase to (1) narrow the negative real interest rate margin, (2) improve market sentiments, and (3) further restore investors’ confidence. In addition, the Committee guided that there is the need to continue to tighten but at a somewhat moderate pace. This is because holding the key policy rate unchanged at a period close to the December festive season and expected heavy spending ahead of the 2023 general elections would jeopardise the gains of previous policy rate hikes and plunge the economy deeper into the inflation trap,” Cordros added.

Overall, global central banks are expected to maintain their aggressive monetary tightening cycle over the short term, in line with the current guidance amid sustained inflationary pressures significantly above pre-pandemic levels.

On the domestic front, analysts expect consumer prices to start decelerating from December, barring new price shocks.

“However, our current expectation is that the headline inflation will remain in the 19.5% y/y and 20.5% y/y region over Q1-23, pressuring the MPC to maintain its hawkish stance more so that the rate is still significantly above the CBN’s target range. Simultaneously, we expect domestic growth to remain intact in the near term in the absence of any significant shock to economic activities. Accordingly, as guided in the meeting, we expect the Committee to march on with its monetary policy tightening, albeit at a slower rate, in the short term to (1) tame inflation expectations, (2) narrow the negative real interest rate gap, and (3) reduce external pressures.”

It is believed that the outcome of the meeting will trigger another round of selling activities on the long end of the yield curve.

“Moreover, given our expectations of continued increase in interest rates, for now, we advise investors to remain cautious about investing in long-duration instruments, which currently may not offer fair compensation for the risks of rising rates.

“Accordingly, we expect investors to continue to play at the short end of the bond yield curve. Overall, we see scope for a continued uptick in FI yields as tightening global financing conditions will compel the government to increase reliance on the domestic market to finance the budget deficit,” experts disclosed.

Given the outcome of the MPC, analysts believe the hawkish tone of the MPC will continue to worsen risk-off sentiments in the domestic bourse.

However, they do not envisage any significant changes in the trading pattern as investors continue to trade cautiously, showing a weak appetite for stocks.

Overall, they predicted that trading in the equities market will remain choppy as income investors continue to cherry-pick stocks with sound fundamentals and attractive dividend yields.

“In contrast, risk-averse investors will likely stay on the sidelines until positive triggers propel market performance. With the MPC meeting out of the way, we believe developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse in the near term,” analysts predicted.

“CBN"