In its bid to curb the nation’s surging inflation, Nigeria’s Apex bank, CBN’s Monetary Policy Committee yesterday, September 27th, 2022, unanimously voted to raise both the MPR (monetary policy rate) and the CRR (cash reserve ratio) while holding all other parameters constant.
While MPR was raised from 14% to 15.50% and CRR increased to 32.50% from the previous 27.50%, the asymmetric corridor around the MPR and Liquidity Ratio (LR) remained unchanged at +100/-700bps, and 30.00%, respectively. The latest rate hike represents the highest since 2002.
During the meeting, ten of the twelve members voted to hike the MPR and CRR by 150bps and 500bps, respectively, while two recommended a 750bps increase of the CRR.
The two-pronged (increasing MPR and CRR) approach took the policy parameters to record highs in a bid to ebb the current level of skyrocketing inflation at 20.52% and also move in tandem with the major central banks, which could, in turn, improve real interest rates and net foreign capital flows. In addition to the double-edged tightening, the CBN suggests an increasing intolerance for the current system liquidity, with banks directed to fund their CRR accounts in line with the latest monetary policy change at the latest on Thursday (Sept 29, 2022) to avoid penalties such as being barred from accessing FX at the CBN windows.
On the one hand, the recent decision by the Committee will likely lead to further increases in primary market auction (PMA) stop rates and yields across domestic fixed-income instruments and also improve carry trade, potentially improving net foreign capital flows. On the other hand, the current bearish sentiments since the commencement of rate hikes in May’22 could worsen on the back of the presence of relatively safer high-yielding fixed-income instruments, the potential passthrough to FX from carrying trade that could be muted due to legacy currency management and the electioneering impacts. Also, while banks’ asset yields are likely to improve on rising interest rates, the gains may be offset by the negative impacts on the cost of funds and credit creation, which in turn will impact companies linked with funds or facilities linked to MPR, facing some difficulties on increased interest expense in the coming quarters.
While it is highly probable for the hawkish stance to persist as it will be largely data-driven, which we are less optimistic about, given the prevailing structural issues, election concerns, and notably our inflation being more supply-driven than demand-driven, we cannot completely overrule a hold stance in the next meeting as a response lag to assess the resultant economic impacts.