May 24, 2023/Cordros Report

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted by a majority vote to hike the Monetary Policy Rate (MPR) further by 50bps to 18.5% at its May policy meeting. Thus, the MPR is now at its highest level since November 2002 (18.5%). In terms of voting pattern, 10 members voted to raise the MPR by 50bps while 1 member voted to increase the MPR by 25bps. In the same vein, the Committee voted to maintain other policy parameters at current levels; the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5%, and Liquidity ratio at 30.0%.

On domestic growth: While the MPC was concerned about the Q1-23 GDP growth (+2.31% y/y vs Q4-22: +3.52% y/y), it attributed the positive performance to the sustained growth in the services sector, progressive uptrend in economic activities and sustenance of broad-based support by the bank in growth-enhancing sectors. Like the prior meeting, the Committee expects that real GDP will continue its moderate recovery over the rest of the year as legacy headwinds linger. Hence, the CBN projects the economy to grow by 3.03% y/y in 2023E (Cordros’ estimate: 2.92% y/y).

On Inflation: The Committee acknowledged that headline inflation remains high largely due to a host of non-monetary factors outside the reach of the CBN such as intermittent PMS scarcity, expectations of short-term hikes in PMS prices, and lingering challenges confronting the food supply chain. Thus, the Committee called on the fiscal authorities to explore other avenues to expand the fiscal safety net and address the urgent need to respond to legacy challenges and emerging shocks impeding the food supply.

Cordros’ View
 
The MPC’s decision to increase the MPR further by 50bps at this meeting was in line with our expectations (see report: MPC Likely to Raise the MPR Further by 50bps) amid the forward guidance provided by the CBN governor at the March meeting. Notably, the Committee stated that the key policy dilemma at this meeting was whether to hold or hike marginally to offset the moderate increase in headline inflation. In the MPC’s view, the balance of the argument leads sufficiently in favour of further smaller rate hikes to (1) consolidate the gains made so far, (2) support the efforts towards moderating demand-pull inflation, (3) narrow the negative real interest rate gap, and (4) boost the MPC’s credibility following the earlier forward guidance to continue to tighten when confronted with unabating price pressures.
 
We do not rule out the Committee increasing the MPR further at its next meeting in July, after which a HOLD consideration is likely over subsequent meetings. This is because MPC’s language tone in the past two meetings suggests they are now concerned about the risks of overtightening in a sticky inflationary environment, more so that they acknowledged that the high inflation is largely due to a host of non-monetary factors outside the CBN’s purview. Finally, our prognosis is also informed by global monetary policy expectations over H2-23, as the forward guidance by the systemic global central banks suggests we may be nearing the peak of monetary policy tightening. On a balance of factors, we expect the Committee to increase the MPR by 25bps – 50bps in the near term and also do not rule out an increase in monetary interventions in growth-enhancing sectors as reducing the interest rate is not an option for now amid elevated price pressures.

Market Impact
 
Fixed Income: We believe investors are unlikely to react significantly to the outcome of this meeting, primarily due to the current system liquidity which remains buoyant. However, we expect the aversion to long-dated instruments to persist due to near-term expectations of a further moderate increase in interest rates. Thus, we recommend investors maintain the strategy of playing at the short end of the yield curve. In addition, like in the prior year, we expect the FG to remain reliant on the domestic debt market and CBN’s Ways & Means advances for financing the 2023FY budget deficit, as the elevated global yields would make foreign currency borrowings remain expensive in the face of tight global financing conditions. Sequentially, we maintain our expectation of an uptick in bond yields over the medium term.

Equities: We do not expect the outcome of the MPC meeting to significantly alter the market’s trading pattern. Indeed, the market stock market gained +0.6% at the close of trading today (YTD: +3.3%). Nonetheless, as domestic investors remain the dominant players in the market (93.7% as of March 2023), we believe sensitivity to an uptick in FI yields will remain a downside to market performance in the short term. Thus, we believe investors will continue to cherry-pick stocks while paying rapt attention to the outcome of treasury bills and bonds auctions to gauge the direction of yields in the FI market. Following the conclusion of the MPC meeting, we believe developments in the macroeconomic environment and corporate actions will shape the overall direction of the bourse.