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Economics…Post-MPC Note…Amidst natural cause for tightening; the MPC maintained “Status Quo”

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The monetary policy committee (MPC) held its meeting on 18th and 19th September 2014, expressing concern over rising trend of consumer prices, modest volatility in exchange rate (especially widening gap of currency prices across market segments; official, interbank and parallel), upcoming redemption of N866 billion AMCON bond which will heighten the “excess liquidity risk” in the banking system, declining crude oil price and attendant weakness in fiscal revenue, as well as probable rise in money supply on the run-up to 2015 elections.

Notably, the MPC acknowledged the natural cause for further tightening, with some members calling for increase in public and private sector CRR, Albeit, the majority ruled in the MPC decision; as six of the twelve members voted for “Status Quo” – retain the MPR at 12% with the symmetric corridor of ± 200bps for the SDR and SLR; 75% and 15% CRR on public and private sector deposits and 1% Net Open Position.

Even as the CBN Governor seems pro-growth, the realities of domestic and global macro headwinds may douse appetite for lower interest rate regime in the near term. Overall, the hawkish sentiment of the MPC sends bearish signals to the yield curve, as we expect yields to rise moderately in the weeks ahead.

Whist domestic investors should provide modest support to sovereign notes (given excess liquidity in the interbank market) as foreign investors further reduce exposure to Nigerian yield curve, we look forward to an average of 30-50bps rise in yields.

Our expectation is a bear flattening”, as we expect the short-dated assets to see faster rise in yields than the long-duration assets, given the outlook of lower yields in 2015H2, when macro headwinds should have eased. Hence, we remain relatively upbeat on long-duration assets, especially as long-only local fund managers are expected to be overweight in this segment of the yield curve.

Decision – overwhelmed by the sentiment for low interest rate: Some members expressed hawkish stance, voting for increase in private and public sector CRR (cash reserve requirement), as proactive zero-cost measures to sterilize the “excess liquidity” in the interbank market, especially ahead of AMCON bond maturity. However, majority of the Committee members (six out of twelve) called for “status quo”; a decision which reflects overwhelming sentiment for lower interest rate and the appetite for credit growth in the economy. Interestingly, the Committee sounded hawkish, recognizing varying domestic and external pressures, which may compromise the stability of the financial system and the economy at large. Precisely, the Committee believed that the trend in monetary and overall macroeconomic variables is a “natural cause” for tighter policy.

Overall, the MPC believes that if need be, it has headroom to react to unfolding pressures from both domestic and global environments. Hence; the status quo votes leads the Committee to;

Retain the Monetary Policy Rate at 12% with the symmetric corridor of ± 200bps for the standing deposit and standing lending facility rates (i.e 10% and 14% respectively).

Keep the private and public sector CRR at 15% and 75% respectively;

Maintain liquidity ratio at 30% and Net Open Position at 1% of shareholders’ fund Implications of MPC decision for financial markets:Notwithstanding the MPC decision to keep policy rates unchanged, the tone of the Committee vis-à-vis the decision may have bearish impact on the financial market. We highlight our broad view below; A “bear flattening” for the yield curve:With one more MPC session in the year, the Committee has sent signals of likely increase in the private sector CRR at November meeting, especially if downside risks remain valid. Given the perception of tightening in the short term, we expect yields to rise moderately, as we expect further sell-off from foreign investors. Notably, the notion that any tightening measure will be momentary will deepen the appetite of local investors for long duration assets, as a way to lock-in yields ahead of monetary policy accommodation (given consensus of the Committee on the need to transit Nigeria to a low interest rate economy to ease the cost of capital to businesses). Thus, we expect yields on the short-end of the curve to rise faster than those on long-dated assets.