Here’s how MPC decisions will affect markets

Recently, the Cardoso-led Monetary Policy Committee (MPC) in its third meeting of the year raised the Monetary Policy Rate (MPR) by 150 basis points (bps) to 26.25percent, left other rates constant.

Before arriving at that decision, the Monetary Policy Committee members deliberated on the following macroeconomic concerns: persistent inflation, foreign exchange (FX) volatility, strength and resilience of the banking system, and economic output.

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Rising from a two-day MPC meeting, the Central Bank of Nigeria (CBN) on Tuesday further ramped up tightening measures to rein in inflation.

The MPC hiked policy rate by 150 basis points (bps) to 26.25percent; retained cash reserve ratio (CRR) for deposit money bank at 45percent; retained asymmetric corridor at +100bps/-300bps; and retained liquidity ratio constant at 30percent.

For many analysts, Tuesday’s decision of the MPC will impact the markets as well.

“We expect the rate hike to further fuel bearish sentiment in the equities market, as investors will likely rotate to high-yielding fixed-income instruments,” said Lagos-based CardinalStone Research analysts.

These analysts at CardinalStone Research said in their May 21 note to investors that they expect to see increased sentiments in low-leverage stocks and those that have a positive correlation with interest rates (example banks)”.

Also, in their May 22 post-MPC commentary, Meristem research analysts said, “In our opinion, the hawkish stance is expected to have varied implications for the financial markets. In the fixed income market, higher yields could attract foreign investment, improve liquidity in the FX market, and potentially stabilise the Naira”.

On the other hand, they foresee a tepid inflow of funds into the equities market, “with potential outflow as investors are drawn to the allure of attractive yields in the fixed income market.”

Vetiva Research analysts said “the Committee’s decision to slow its hawkish momentum is due to the moderation in month-on-month (m/m) inflation and the need to consolidate on previous hikes. We also believe the foreseeable accretion to reserves from improved oil production, a Eurobond issuance, and multilateral inflows could provide further succour to the Naira and reduce the need for further hikes”.

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According to Vetiva analysts, “While we see multilateral inflows and high money market rates keeping the Naira in check, we believe further upticks in inflation may necessitate mild tightening. Our base case posits that inflation may peak in July and begin to moderate in August.

“This could give room to a 100bps hike in July followed up with a terminal 50bps hike in September. Should inflation begin to moderate from June alongside stronger-than-anticipated accretion to reserves and subsequent FX gains (bull case), we could see a terminal 100bps rate hike in July. Over the near term, we expect investors to take advantage of the attractive yields on treasury bills,” Vetiva analysts further said.

Also, for Comercio Partners Research analysts, the effectiveness of rate hikes would in the short term be directed to attracting dollar inflow and strengthening the currency, as Nigeria is import-dependent. “When the exchange rate strengthens, inflation should reduce”.

“The Apex Bank’s rate hike is expected to exert increased strain on the economy, particularly on businesses. The economy, already grappling with numerous social and economic challenges, may face further destabilisation. An increase in the minimum cost of borrowing could slow down the corporate sector, potentially leading to a decline in the stock market,” Comercio Partners Research analysts said in their May 21 note.

They further noted that the recent interest rate hike is expected to stimulate activity in the fixed-income market by making new securities more attractive.

“New bonds will be issued with higher yields to reflect the increased policy rate. Investors will demand higher returns to compensate for the elevated interest rate environment. As a result, long-duration bonds, which are more sensitive to interest rate changes, are likely to experience greater price declines compared to short-duration bonds as rates rise,” Comercio Partners Research analysts further said.