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The
Monetary Policy Committee (MPC) in Nigeria at its recently concluded meeting
decided to cut its benchmark interest rate (MPR) by 50bps to 13.5%, the
first accommodative decision since July 2016. This policy rate reduction
marks a shift in MPC’s tightening posture in the past three years and
sends a signal to the market on the new appetite of the monetary policy
authority to support economic growth. All other variables were held
constant; the asymmetric corridor retained at +200bps/-500bps; cash
reserve requirement maintained at 22.5% and liquidity ratio kept at 30%.
Implications for markets
As
the decision defies consensus view of “status quo”, there has been
further downtrend in the sovereign yield curve. As participants seek to
lock-in current yield, market may remain bullish and this may continue to
impact on the yield curve, as rates/yields may steadily ease. Notably,
the Debt Management Office (DMO) also aligned with the stance of the MPC
at its auction on Wednesday, March 27, 2019 where it priced less than
N30billion of the 5-year, 7-year and 10-year FGN Bonds at 13.5%, a
significant discount to the 14.52% and 14.94% marginal cut-off rates at
which it issued same instruments at the February auction.
Whilst
real rate remains positive (given relatively benign inflation outlook),
foreign portfolio inflows (FPIs) into the fixed income market may wane,
as the interest rate differential with developed markets narrows. More
so, FPIs may seek alternatives in peer markets, with relatively
higher yield environment and similar FX market outlook. Nonetheless, the
CBN seems to have adequate buffer to support the local currency, with
external reserve hovering USD44 billion; 13 months of import cover; one
of the highest for an emerging market.
The
lower yield on sovereign instruments should help to reduce future fiscal
debt service burden, as the government may refinance maturing obligations
or fund new deficits, at relatively lower cost. The development decision
should be positive for funding the 2019 budget deficit and hopefully lead
the way for lower cost of capital for corporates and ultimately stimulate
credit flow and broader economic activity. Though the reduction in MPR to
13.5% reduces saving deposit rates by 0.15% to 4.05% per annum, the
broader impact on the economy should be positive for savers and the
economy at large.
What informed the MPC’s decision?
Stable
domestic macros: The MPC was happy with the
stability in exchange rate and consumer price, with Naira appreciating to
N360.25/USD at the I&E window (even so it has depreciated slightly to
N360.60/USD after the decision) and headline inflation berthing at 11.3%.
The strong external reserve and positive outlook on oil price reinforces
the constructive view of the Committee on the fundamentals of the
economy, particularly as the recovery of foreign portfolio investors
(FPIs) has been strong over the past two months. Notwithstanding concerns
around slowing global economy and implications of U.S/China trade war and
protracted Brexit, the new accommodative stance of the Federal Reserve
and peer central banks provides comfort on the limited risk of external
vulnerabilities.
…but
growth remains elusive: The MPC noted
the stronger GDP growth momentum recorded in the last quarter of 2018,
when the economy grew 2.38%, but reckon that aggregate demand remains
weak, thus requiring policy push. The Committee believes the
implementation of new minimum wage should give impetus to consumer
demand, but asserted that such fiscal policy needs to be supported with
monetary accommodation at this time to achieve the much needed
accelerated recovery in economic growth. Given fiscal constraints
(revenue shortfalls) in fully implementing the Economic Recovery and
Growth Plan (ERGP), the MPC offered to support growth, through credit
stimulation, particularly as expectation of stronger GDP growth in 2019
is based on improved flow of credit to the real sector.
Now that the rates are reduced banks will have to adjust their own rates as this is the new benchmark.
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