Vetiva Research - Post-MPC Release - May 2011




Tuesday, May 24, 2011, Vetiva Research
MPC Decision
The Monetary Policy Committee (MPC) raised the benchmark interest rate for the fourth time since the initiation of tightening in Sept’10. Following her 220th Meeting, the Committee hiked the MPR by another 50bps (from 7.5% to 8%); thus, defying market consensus and our expectation of an unchanged policy rate.
In addition, the Cash Reserve Ratio (CRR) was raised by 200bps to 4% (effective June 8, 2011).
This action was premised on the need to curtail inflation and defend the local currency (Naira) as the MPC believes that the post-election pressure on Naira is largely fuelled by liquidity-induced speculation, especially with the liquidity impasse of the AMCON deals.
We pay more attention to the 200 bps increase in CRR
The effect of the CRR hike may further suppress the sluggish growth in private sector credit as it contains the money creation potentials of the deposit money banks.
While the rate hike will impact cost of capital across all instruments, the sterilization effect of the 2% increase in CRR has a potential freeze of some c.N220 billion in liquidity.
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