… Tightens noose on its lending window
The Central Bank of Nigeria (CBN) on Tuesday raised the hope of many citizens and investors for a moderation in inflation rate through a 50-basis points hike in interest rate and an adjustment to banks’ borrowing from its window.
After the two-day Monetary Policy Committee (MPC) in Abuja on Tuesday, the apex bank raised the monetary policy rate (MPR), also known as the benchmark interest rate, to 26.75 per cent with an eye on combating inflation and fostering a favourable climate for foreign investment.
The banking and financial institutions regulator has lifted its key interest rate for a 12th straight time and said it remains committed to reigning in inflation.
The CBN also adjusted the asymmetric corridor from +100/-300 to +500/-100 around the MPR, retained the Cash Reserve Ratio (CRR) of Commercial banks at 45.00 per cent, 14 per cent for Merchant Banks, and held the liquidity ratio constant at 30.00 per cent.
“While we had doubted the effectiveness of any further policy rate tweaks, once again the Cardoso Central Bank has over-delivered on market expectations,” said Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank.
She said the 50 bps of further tightening in the MPR was not the key point; the considerable adjustment in the Standing Lending Facility Rate (SLF) is. “The asymmetric corridor around the policy rate was adjusted to +500 bps/-100 bps from a previous +100/-300bps, raising both the SLF and Standing Deposit Facility (SDF) rates. De facto, this was much more of a tightening than anyone expected,” Khan added.
SLF is a short-term loan that a Central Bank provides to commercial banks. It’s a way for banks to get quick access to cash if they need it to meet customer withdrawals.
SDF is a financial tool used by some Central Banks, which allows commercial banks to deposit their excess funds with the central bank for a short period and earn interest. This helps the central bank control inflation by mopping up excess liquidity in the economy.
According to analysts at Afrinvest West Africa, the surprise tweak in the MPR suggests that the CBN is aggressively dissuading banks from tapping liquidity through the Standing Lending Facility 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 cent per annum from 27.25 per cent previously. Meanwhile, banks with excess liquidity willing to play at the Standing Deposit Facility window would only receive 25.75 per cent 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 N73.6tn 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,” the analysts said.
They admitted that 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.”
Uche Uwaleke, special adviser to the Chairman of the Senate Committee on Banking, Insurance, and Other Financial Institutions, said “The adjustment to the asymmetric corridor around the MPR is a major source of concern for me.”
He said the MPC communique did not provide any explanation for increasing the SLR from +100 to +500 and the SDR from -300 to -100.
“By implication, with an MPR of 26.75 percent, banks will now get loans from the CBN at 31.75 percent while they will be remunerated for their excess deposits at 25.75 percent. This will further squeeze liquidity from the banking system and jerk up cost of credit with adverse consequences on output and the equities market. The MPC communique should have made it clear why it was better to mask the tightening in the asymmetric corridor than reveal it in the MPR,” he said.
“Assuming all other factors remain constant, we expect today’s hawkish stance to drive a modest increase in fixed-income yields,” analysts at Cardinal Stone, said.
“In our view, today’s decision will likely be the final rate hike this year, as we anticipate the CBN will hold interest rates steady, supported by an expected moderation in inflation due to the base effect starting in July 2024. Consequently, we maintain our recommendation that fund managers adopt a laddered approach with a greater emphasis on longer durations,” the analysts added.
The analysts believe that the current interest rate level will help to retain Nigeria’s carry (interest rate differential) as one of the most attractive in Africa, which will further incentivise foreign inflows. So far in 2024, Nigeria has attracted $4.69 billion from both cold and hot monies, a traction last observed before the advent of the pandemic.
This year, the MPC has aggressively implemented a cumulative rate hike of approximately 800 basis points since February 2024, alongside adjustments to other monetary tools, to combat rising inflation. In comparison, 2023 saw a total rate hike of 225 basis points.
Nigeria’s headline Consumer Price Index (CPI) reached 34.19 per cent, up from 33.95 per cent in May, reflecting a 0.71 per cent increase. On a month-to-month basis, the headline inflation rate for June 2024 was a 2.31 per cent increase, which is 0.17 per cent higher than the 2.14 per cent recorded in May 2024.
The MPC re-emphasised its commitment to continue its tightening cycle in response to ongoing inflationary pressures.
