CBN takes a bold step – Bismarck Rewane

Proshare

 

Wednesday November 25, 2015 06:00 AM / FDC
 

The MPC as widely expected tinkered with the MPR and other key parameters of monetary policy at its just concluded meeting. Notably, it slashed the MPR by 200 basis points to 11% p.a. But more importantly is the adjustment of the corridor around the MPR to an asymmetric corridor of +2% and -7%. What this effectively means is that the CBN will borrow at 4% p.a and lend at 13% p.a. By this significant move, the CBN will be reducing the FGN debt service burden by about a half. The Federal government debt service burden in 2014 was in excess of N1 trillion. The CBN has come under pressure because of external imbalances arising from reduced forex earnings from a very soft oil market.
 

This decrease in interest rates goes against the trend in most African countries whose monetary policy committees have been raising interest rates. South Africa increased its interest rates by 25 bps at its last MPC meeting to 6.25%. Ghana also increased its interest rate from 25% to 26%. Though Angola and Kenya maintained status quo at their last MPC meetings, both countries have increased their interest rates during the year.
 

The Decisions 

  • Reduced monetary policy rate (MPR) from 13% p.a. to 11% p.a.

  •  Lowered the CRR by 500 basis points to 20%

  •  Changed the symmetric corridor of +/- 200 basis points around the MPR to an asymmetric corridor of +200/-700 basis points around the MPR. This reduces the cost of borrowing for government and the private sector. In addition the lower band indicates the CBN’s desire to spur lending to the real sector by discouraging commercial banks from placing funds with it

  • Liquidity ratio was retained at 30%

  • Net open foreign exchange trading position was retained at 1%
     

Impact of decision on markets
The MPC’s decision will have far reaching implications on Nigeria’s economic and business climate.
 

Stock market
The markets had been anticipating changes, but definitely not of this magnitude. The Nigeria stock market, which is already in bear territory, may recover as conventional logic suggests that stock prices rise as interest rates decrease. However, the equities market is also driven by other fundamentals such as expected earnings as well as investor confidence in the country’s economic direction. Already Nigerian Treasury bills are yielding less than 4% p.a, much lower than the inflation rate. As interest rates have been reduced, there may be capital flight from the Nigerian fixed income market, especially in light of the anticipated rate hike by the US Fed in December.
 

Exchange Rate
Now that banks are compelled to lend, there will be increase in available funds for corporate and individuals who may want to hedge against the dollar. This will add pressure on the naira. With lower borrowing costs, manufacturing companies will be induced to borrow more forex. The parallel market had already crashed to N241 before the meeting. This was based on speculative rumours of a likely devaluation. We expect the naira to trade sideways until some major shocks or shifts after the OPEC meeting on December 4. 

 

Typically the naira appreciates in December because of inflows from visiting friends and relatives. In the last 2 years the naira actually weakened, contrary to expectations. This time we expect the naira to decline after the forex market closes on December 21.
 

Inflation
The growth in M2, which is -5% (annualised), gives some room for increasing money supply without stoking inflation. However, the refund of CRR and the lower MPR will definitely lead to increase in anticipated inflation.
 

Outlook
The CBN did not give any indication of a possible adjustment in the exchange rate. Though the new changes made to the policy rate and CRR indicate the apex bank’s concern with the slowing economic growth, the exchange rate and its policy implications is still an issue that the CBN will need to answer. All eyes will now move to the January meeting and the 2016 budget of the FGN to see what the economic direction of Nigeria is likely to be.
 

Related News 

 

1.  MPC: Behind the Curve, Playing Catch Up 

2.   CBN Communiqué No. 104 of the MPC Meeting - Nov 23-24, 2015

3.   CBN Adopts Dovish Stance to Spur Growth - Likely Implications

4.   Will 2015 supplementary budget boost paper supply?

5.    MPC Meeting Preview: A ratification of on-going easing

6.   Will A Rate Cut Stimulate Lending?

7.   CBN Directs 3 Banks with CAR Below 10% to Recapitalize by June 30, 2016  


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