• Monday, April 15, 2024
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How CBN’s jumbo rate hike will affect investors, borrowers, savers

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The Olayemi Cardoso-led Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the main interest rate by 400 basis points on Tuesday to 22.75 percent. The bumper rate hike, aimed at curbing inflation and stabilising the economy, will affect investors, borrowers and savers in various ways.

The monetary policy rate (MPR) is the rate at which the CBN lends to commercial banks. Commercial banks then use this rate as their benchmark rate for their lending.

The National Bureau of Statistics has reported a consistent surge in inflation, with the headline inflation jumping to 29.9 percent in January from 28.92 percent in the previous month.

The MPC also increased the cash reserve ratio (CRR) to 45 percent from 32.5 percent, and the liquidity ratio was retained at 30 percent. The asymmetric window was adjusted from +100/-300 basis points to +100/-700 basis points around the MPR.

Analysts at BancTrust & CO said the outcome of the meeting confirmed the move towards inflation targeting and the much-needed liquidity tightening to stem the depreciation of the naira.

“While some of the drivers of headline inflation (29.9 percent in January 2024) are structural, a tighter monetary policy supporting price discovery in the FX market and an appreciation of the naira could ease imported and domestic food inflation, the latter through lower energy and fertiliser cost,” they said.

Joshua Joseph, fixed income analyst at CSL Stockbrokers, said the rate hike will have a ripple effect across the economy, impacting borrowers, savers, and investors in different ways.

He said the interest rate hike for investors investing in the fixed-income market remains very attractive at this rate.

“T-bills in the secondary market are doing about 16 percent compared to historically, which is very attractive. Pension fund administrators will make large returns compared to what they’ve been making in years and fund managers,” he said.

He added: “What they have been doing for a while now is to mop up liquidity and with this, it’s looking more difficult for banks to make money.

“With CRR at 45 percent, the amount of money available for businesses to borrow will reduce because the loans will have very high rates, so there’ll be little money for the multiplier effect to take place.”

Joseph said rates will go up on the money markets, such as bonds, and T-bills as they are already doing well, “At the next auction of the T-bills, we are going to see it well oversubscribed, It’s a good note for investors.”

He said that for savers, when CBN increases the MPR, banks also increase their lending rate. “The interest rates on savings are going to increase but not as much as lending rates; interest on savings won’t be that high.”

For borrowers, especially businesses, Joseph said: “It will be very difficult to get loans and if they do, they will pass it down to consumers. When it passes down to consumers, there will be less cash chasing a few goods – meaning inflation will correct later on.”

Joseph said the decision to hike interest rate lies at the expense of growth rate because when companies can’t borrow money, business activity and consumption levels will reduce.

For the stock market, Mustapha Umaru, an equity research analyst at CSL Stockbrokers, said the hike in MPR will hurt the stock market, “reason being we see investors flocking into the fixed income market due to favourable yield environment and further increase in return due to the hike.”

Already, the market took major breather in early trading on Wednesday as a higher interest rate stoked bearish sentiment in the market.

Analysts at Cordros Securities said that the rate hike will have a positive effect on bonds. “Sequentially, we maintain our expectation of an uptick in bond yields over the medium term. Aside from the impact of the higher MPR, our prognosis also takes into account expectations of a sustained imbalance in the supply and demand dynamics, more so that the FGN’s 2024FY borrowing needs remain sizable.”

“With the 400 basis points (bps) hike in MPR to 22.75 percent in the just concluded MPC meeting, we expect to see the market react negatively, as yields in the fixed income space remain attractive,” said Vetiva Research analysts.

In their post-MPC commentary, CardinalStone Research analysts said that since the start of the year, bearish sentiments have continued to rattle the fixed-income market as unprecedented issuances at Nigerian Treasury bill and bond auctions fuel higher yields.

In their view, the strong hawkish actions of the CBN are likely to fuel higher yields in the fixed-income market in the near term.

They said: “For the equities market, the higher interest rate is less compelling for valuation and could further stoke bearish sentiment in the market.

“Nevertheless, sell-offs may present decent entry opportunities in fundamentally sound stocks, such as those with positive interest sensitivities to their margins, robust cash and low leverage.”

The analysts believe that savvy investors may also look for tactical opportunities to earn dividend income as full-year numbers begin to trickle in March/April and onwards.

“The recent moves are also positive for the FX market, with associated inflows likely to support CBN’s recommencement of dollar sales to the BDCs. We, therefore, see latitude for improvement in FX liquidity and potential naira gains in the near to medium term,” CardinalStone Research analysts said.