Decision: MPC Increases MPR by 100bps

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March 22, 2011 
 
 
NIGERIA | POST – MPC RELEASE |MARCH 2011   
 
MPC Decision: Not relenting on its pursuit of economic stability, especially regarding prices, exchange rates and to rein in the effects of fiscal indiscipline, the MPC resolved to embark on further tightening with the following decisions:
 
  • Increase MPR by 100bps (from 6.50% to 7.50%) 
  • Maintain the symmetric corridor at +/- 200bps 
  • Keep the Cash Reserve Requirement (CRR) Ratio of banks at 2% and Liquidity Ratio (LR) at 30% 
  • Extend the CBN guarantee of interbank funds and foreign credit lines by 3 months to September 30, 2011  
Implications:  
 
  • Interest Rates: We expect the interbank rates to jump immediately in reaction to the MPR increase. The shorter end of the yield curve will also adjust sharply as yields trend higher. Deposit Rates would edge higher slowly. 
  • Exchange Rates: In our view, demand pressures at the bi – weekly auctions should ease marginally as liquidity aiding speculative demand is restrained. 
  • Inflation: The impact on inflation may be minimal as the CPI is still largely influenced by structural bottlenecks, which limits the effect of the MPR. 
 
Conclusion:
 
  • With the expected impact of the MPR increase on bond yields, Fixed Income assets will increasingly become more attractive. However, with an outlook of rising inflation and interest rates, we are cautious on investments in this space as the threat of a further steepening of the yield curve exists. We note that appropriate entry and exit strategies should be applied to Fixed Income investments at this point. 
  • Following impressive results from the banks today (Zenith, GTBank and Access), our positive outlook on the Equity market is reinforced with our year – end target return of 18%. We thus reiterate our overweight position on Equities. 
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