When the Monetary Policy Committee (MPC) of the Central bank of Nigeria (CBN) raised its key interest rate last month, it brought hope to savers, yet the rise in the 1-year Treasury Bill (T-Bills) since has been modest. The MPC at its May meeting hiked its policy rate by 150bps to 13percent.
“We assumed a rate hike on the back of rising inflation as well as recent policy rate hikes by central banks in advanced economies. However, a modest rate hike was the general expectation. Market interest rates have not risen much since then.
This makes us question the transmission mechanism between official and market rates,” said Coronation Research analysts in their June 14 note to investor.
They noted further that: “On the day of the rise in the Monetary Policy Rate (MPR) May 24, the 1-year T-bill rate was 4.86% and the Federal Government of Nigeria (FGN) 5-year Naira-denominated bond yielded 10.85percent. At the end of last week, these rates were 5.06percent and 10.76percent, respectively, so the 1-year T-bills yield rose by just 20 basis points (bps) and the 5-year yield was 9bps lower.
This raises the question: “If the CBN signals a rate rise with the MPR, how is that transmitted into the market?” The clearest transmission method between the CBN and the financial system is the asymmetric corridor of +100bps and – 700bps around the MPR which impacts the CBN’s Standing Lending Facility (SLF) and Standing Deposit Facility (SDF).
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The SLF is a line of short-term (overnight) credit available for commercial banks to draw on in times of liquidity shortages while the SDF is a window for banks to deposit excess liquidity (up to N2billion) overnight with the CBN. Following the rate hike, the SLF and SDF rates are at 14percent and 6petcent. One-year T-bill rates (at least in the primary market, where they are 6.88percent) are above the lower end of the asymmetric corridor, so to this extent one can demonstrate that the mechanism is working.
Ridwan Bello, President Rizq group, investment firm said that the CBN monetary policies intervention to fight increasing inflation rate by raising interest rate might be too late.
“Inflation rate going up for so long without adjusting the interest rate for so long has made it difficult for the intervention to catch up in fixing the inflation rate.”
He further explained that investment tools such as the Tbills cannot catch-up with the double digit inflation rate.
“There’s no incentive for saving in Tbills that has a single digit returns compared to a double digit inflation rate.”
“The best thing to do is to seat on your money, there might be distressed assets that can later be invested in.”
