…equities shed N47bn as investors weigh options
The Central Bank of Nigeria (CBN), the country’s apex banking regulatory authority, continued its hawkish stance as its Monetary Policy Committee (MPC) on Tuesday raised the benchmark interest rate, the Monetary Policy Rate (MPR) by 50 basis points from 26.25 percent to 26.75 percent, citing the effect of rising prices on households and businesses.
The Tuesday, 23 July 2024 meeting was the 296th meeting of the CBN’s MPC, the highest decision-making body when it comes to monetary matters in the country.
The MPR is the rate at which the Central Bank lends to commercial banks. The hike in the rate is expected to make borrowing more expensive, thereby reducing the volume currency in circulation which will eventually taper inflation.
“The Committee was mindful of the effect of rising prices on households and businesses and expressed its resolve to take necessary measures to bring inflation under control. It re-emphasised its commitment to the Bank’s price stability mandate and remained optimistic that despite the June 2024 uptick in headline inflation, prices are expected to moderate in the near term. This is hinged on monetary policy gaining further traction, in addition to recent measures by the fiscal authority to address food inflation,” Olayemi Cardoso, CBN governor, announced at the end of the two-day meeting on Tuesday.
Other decisions of the MPC include the adjustment of the asymmetric corridor from +100/-300 basis points to +500/-100bps around the MPR; retention of cash reserve ratio at 45 percent for deposit money banks, and 14 percent for merchant banks, just as the liquidity ratio was retained at 30 percent.
The cash reserve ratio is the proportion of commercial banks’ total deposits that must be held in reserve while the liquidity ratio is also the proportion of deposit money banks’ assets that must be held in liquid form that can easily be converted to cash for immediate or short-term obligations.
The hike in MPC was widely expected by many stakeholders in both the financial and real sectors, following an uptick in June inflation rates. Headline inflation for June rose to 34.19 percent while the corresponding food inflation surged to 40.87 percent.
“The further hike in the MPR (though arguably compelling) should exert a negative pass-through effect on real sector players, especially in terms of interest expenses on debt funding. Therefore, coupled with the other headwinds such as inflation squeeze and FX volatilities, we expect real output growth to be pressured for the rest of the year,” analysts at Afrinvest, one of the leading investment houses in Nigeria, said, in a note to investors.
“The surprise tweak in the MPR suggests that the CBN is aggressively dissuading banks from tapping liquidity through the Standing Lending Facility (SLF) window. For context, the tweak in the asymmetric corridor to +500/-100bps around the MPR implies that banks seeking to tap funds through the SLF window would have to pay a cost of fund of 31.75% per annum from 27.25% previously.
“Meanwhile for banks with excess liquidity willing to play at the Standing Deposit Facility (SDF) window would only receive 25.75% interest per annum, thereby expanding the negative spread between SLF and SDF to 600bps from 400bps. Based on our assessment of industry data, banks tapped ₦73.6tn through the SLF window between January and July 2024, representing 8.5x the size of activities at the SDF window. We expect pressure to mount on banks’ ability to balance risk-return going forward,” Afrinvest added.
Meanwhile, the equity market reacted to the CBN announcement with the All-Share Index (ASI) of the Nigerian Exchange Group (NGX) closing in the negative territory yesterday. ASI closed at 100,487.12 points Tuesday as against 100,568.60 points on Monday. The market capitalisation closed at N56.898 trillion on Tuesday compared to N56.945 trillion on Monday amounting a loss of N46.7 billion in the value of listed equities or a decline by 0.08 percent in equity value.
In a similar development, the CBN will today auction three fixed income instruments at the Primary Market Auction. The first instrument is the 91-day treasury bills with an offer size worth N16.48 billion. Advised rates range from 16 percent to 16.90 percent. The second instrument is the 182-day treasury bills worth N6.44 billion with advised rates ranging from 17.20 percent to 17.80 percent. The third instrument is the 364-day treasury bills worth N255.04 billion with advised rates ranging from 19.50 percent to 21.90 percent.
“At the most recent Primary Market Auction (PMA), the CBN offered a total of NGN166.11bn across three instruments. This represents a 27.10% decrease from the NGN228.71bn offered at the previous auction but is still 3.75 times higher than the amount offered two auctions ago,” Meristem Securities said in a note to investors.
