Possible Implications of MPC's 100bps Policy Rate Cut

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Wednesday, September 23, 2020 08:41 AM / By CardinalStone Research / Header Image Credit: NTA


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MPC surprises with 100 bps cut in MPR

The monetary policy committee (MPC) surprised market watchers with a 100bps reduction in its key policy rate to 11.5% at the end of its two-day policy meeting yesterday. After adjusting the policy rate only three times in its prior 25-meetings, the committee has now reduced the MPR twice in 7 months in 2020 in response to current growth concerns. In addition to this rate cut, the asymmetric corridor around the MPR was adjusted to +100/-700bps (previously +200/-500 bps). This corridor adjustment suggests that the CBN will now borrow from banks at MPR minus 700bps (3.5%) and lend to them at MPR + 100 bps (12.5%). 

 

In line with our surmise (see: An Eye into Possible MPC Outcomes), the committee noted that conventional monetary tools are unlikely to appropriately tackle inflation, which has been primarily pressured by structural supply-side factors. It, therefore, revealed intentions to tackle inflation through sustained development finance initiatives and direct interventions aimed at reducing supply bottlenecks.

 

Below are some of the possible implications of the MPC's decisions

  • The reduction in MPR is likely a signal of the apex bank's intention to sustain a dovish orientation in the coming months. We recall that the MPR cut of March 2019 preceded several accommodative administrative measures including the introduction of the LDR policy, the review of standing deposit facility guidelines, and the exclusion of non-bank institutions and individuals from OMO market.

  • For banks, the decision to reduce the MPR would further moderate cost of funds, which, in isolation, should ordinarily be positive for earnings. But simultaneous reductions in interest on loans and asset yields are likely to offset the pass-through from the reduced cost of funds on NIMs.

  • Although the growth inducing rate cut could signal opportunities for reduction in lending rates and, consequently, support spending, we assess that banks are likely to remain guarded regarding credit creation in the near term due to broad macroeconomic concerns and fear of higher impairments charges. This cautious lending may translate to lower than expected credit creation for the real sector.

  • We believe direct interventions could be accelerated to provide some latitude for growth stimulation. Yet, the limited scale of the intervention programs still underpins our expectations for a prolonged U-shaped recovery from the current growth setback.

  • Lower interest rates are conventionally supportive of equity markets as lower finance costs may provide support for earnings. 

 

The MPC's decision signals its intention to maintain low yields in the fixed income space. The CBN may look to implement this through a combination of administrative measures and strategic liquidity management in the near term. 

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