CBN Adopts Dovish Stance to Spur Growth - Likely Implications

Proshare

Tuesday, November 24, 2015 04.30PM / Greenwich Research

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria held its last meeting for the fiscal year 2015 between November 23 and 24. The Committee reviewed recent developments in the global and domestic economy with emphasis on declining GDP growth.

Key Deliberations Point:

·         The potential hike in the United States Federal Reserve rate.

·         Declining GDP growth.

·         Nigeria’s debt service profile.

·         Credit to the real sector.

·         Rising inflationary pressure.

·         Pressure on reserves and exchange rates.

 

After extensive deliberations, the MPC decided by majority vote to focus on stimulating growth in the Nigerian Economy by adjusting the following indices:

·         Reduce the monetary policy rate (MPR) from 13.0% to 11.0%;

·         Reduce the CRR from 25% to 20%; and

·         Replace the symmetric corridor with an asymmetric corridor of +200bps and -700bp.

 

Likely Implications

Impact on liquidity:

 

The reduction in the CRR on Private Sector Deposits will further relieve DMBs from liquidity squeeze and increase the need for banks to match additional liabilities with assets. The introduction of the asymmetric corridor will reduce the incentive for banks to place money with the CBN at its Standing Deposit Facility (SDF), as it will now attract only 4.0% interest rate per annum (11-7%).

 

Impact on the Real Sector:

 

Deposit Money Bank’s (DMBs) will need to increase their lending to the real sector as M2 will rise by ~ 40.0% with limited fixed income instruments available. DMBs will look to create risk assets from genuine economic agents with low gestation periods (Trade, Manufacturing & Construction etc.)

 

Impact on the Financial Market:
We expect increased demand for short tenor instruments (T-bills, Commercial papers & 3-5 year Bonds) over the next week and a short-term rally on select counters at the equity market. 

 

 

Impact on the Federal Government:
In our view, this move will pave the path for Government’s borrowing needs in 2016 to drive its spending plan and repay its existing debt.

 

 

Impact on Inflation and Exchange Rates:
These two indicators will likely deteriorate in the medium-long term as long as the accommodative policy persists.

 

 

Related NEWS

 

1.      CBN Communiqué' No. 104 of the MPC Meeting – Nov 24, 2015

2.     MPC Meeting Preview: A ratification of on-going easing – Nov 24, 2015

3.     Will A Rate Cut Stimulate Lending? – Nov 24, 2015

4.     Pre-MPC Meeting Considerations and Policy Policy Options - Strong Argument to Lower the CRR – Sept 18, 2015 

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