CBN’s new policy seen heaping pressure on T-Bill yield

Yields on Treasury bill (T-Bill) instruments are expected to remain pressured, and banks will likely increase customer deposit rate following the new policy on banks standing deposit by the Central Bank of Nigeria (CBN) on Tuesday.

After its two-day Monetary Policy Committee (MPC) in Abuja on Tuesday, the CBN raised its benchmark interest rate known as the Monetary Policy Rate (MPR) by 25 basis points to 18.75 percent from 18.5 percent.

By unanimous agreement of 11 members present at the meeting, the CBN also narrowed the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.

Folashodun Shonubi, acting governor of the CBN, who announced this on Tuesday, said the Committee remained cautious in arriving at a policy decision as members noted the need to continue to support investment which will ultimately lead to the recovery of output growth.

“The balance of these arguments thus, leaned in favour of a moderate rate hike, to sustain efforts at anchoring inflation expectation, narrow the negative real interest rate gap, and improve investor confidence,” he said.

Razia Khan, managing Director, Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, said the CBN raised its policy rate by 25bps to 18.25 percent (our expectation: 50bps) and announced changes to the asymmetric corridor that effectively raise the rate on the Standing Deposit Facility (whether restrictions on the use of the Standing Deposit Facility (SDF) apply, must still be clarified).

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Johnson Chukwu, managing director/CEO, Cowry Assets Management Limited said what this means is that when a bank wants to borrow from the Central Bank, it will borrow at MPR plus 100 basis points. Now that MPR is 18.75 percent, a bank goes to the CBN for credit support, and the CBN will lend at MPR plus 100 basis points, which is 18.75 plus 1 percent, which is 19.75 percent.

“When the banks want to place their excess liquidity with the Bank, they will place at MPR minus 300 basis points, which means they will now place at 16.75,” he said.

Ideally, he said this will encourage banks to pay higher interest rates to depositors. “If a bank pays you 12 percent, they can as well take it to the CBN. The only issue is that they have to deal with a Cash Reserve Ratio (CRR) of 32.5 percent,” he said.

Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said banks will be placing money with the CBN at 16.75 percent. If they want to borrow money from the CBN, it will be at 19.75 percent.

He said the SDF, which is the overnight deposit, will allow banks to deposit their excess liquidity and earn interest. He noted there is a cap on the amount banks can place with the CBN, which is N2 billion.

Akintoye Oyelakun, a Lagos based portfolio manager, yields might remain pressured despite the increase in MPR as other factors such as system liquidity also play a major role in interest rate direction.

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He said while the adjustment of the asymmetric corridor would have been a good way to mop up some amount of liquidity, the cap of N2bn still remains on the SDF. “Comparing this to the system liquidity, we may not witness a drastic impact on inflation,” he said.

Secondly, he said the MPR was correctly raised by 25bps in response to high inflation, adding that changes in the MPR have not really impacted the interest rate environment historically.

“Instead, investors consider changing interest rates in the money market instruments as a guide towards yield direction. Nonetheless, this is a different regime and one needs to observe what the stop rates at the t-bill auction would look like as this would determine to a large extent what to expect in terms of effectively mopping up excess liquidity. Additionally, I hope the SDF limit would be adjusted significantly higher so that it becomes attractive to the banks,” he said.

Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said “the CBN is saying in the face of rising inflation rate, in the face of global investors thinking about where and how to look for good yield, good asset, where fund will move to, the CBN says expansionary monetary policy will not be good with economic reality in Nigeria today.

Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said, the tepid increase by just 25 basis points to 18.75 percent is an acknowledgement of the fact that there’s very little the CBN can do to tame supply side- induced inflation via the policy rate.

“On the other hand, a decision to maintain policy parameters could be misconstrued as insensitivity on the part of the CBN with respect to rising inflation. So, it does seem that the MPC decision is an attempt to thread a middle-of-the road path,” he said.