In a shocking turn of events, the Monetary Policy Committee (MPC) cut its key policy rate MPR by 100bps to 12.50%, having maintained the prevailing rate over a year, while retaining all other policy parameters; CRR at 27.50%, Liquidity Ratio at 30.00%, and the Asymmetric Corridor at +200bps and -500bps around the MPR.
The committee reviewed the recent developments in the global and domestic space, as the
extended COVID-19 containment measures induced an economic shock. Thus, the committee observed the unprecedented fiscal and monetary support globally, weak aggregate demand, oil price shock, stock market crashes, record levels of unemployment, capital flow reversals across the emerging markets, mounting public debt as well as divergent forecasts across emerging economies.
Key macroeconomic variables such as the; slowdown in economic growth, the downtrend in PMI, an uptick in the inflation rate, pressured currency, and improved sentiment of investors towards the equities market was highlighted on the domestic scene. Hence, the committee felt that a loosening stance will trigger credit expansion to critically important sectors, which would, in turn, stimulate aggregate demand and supply in the short term, and even quicken the rebound in economic growth.
MPC’s Key Considerations
❖ In arriving at its decision, the committee gauged the unprecedented and wide-ranging fiscal and monetary stance, having continually delivered their primary objective to mitigate an economic crisis and avoid an economic recession. Ultimately, significant uncertainties surround the resolution to the pandemic, precipitating varying forecasts among institutions and central banks.
❖ On the global economy, the committee stated that the restrictions on movements and economic activities had forced consumer spending solely on essential produce, thus suppressing aggregate demand, and placing inflation to levels below the 2% target. Further, the rebalancing of portfolios to safer assets in advanced economies should create renewed pressures on currencies of some EMDEs with a likely pass-through rate to domestic prices.
❖ On the domestic front, while the committee reiterated that GDP in 2019 expanded the most since 2015, the modest growth recorded in the first quarter of 2020 is expected to decline, albeit marginally in the coming period, as the influx of monetary and fiscal stimulus is expected to avert an impending recession.
❖ As indicated by the PMI, the health of manufacturing activities shuttered, as the manufacturing and non-manufacturing PMI contracted to 42.40pts and 25.30pts respectively, dragged by the declines across all its components.
❖ The committee also observed the marginal growths in monetary aggregates, however, remaining below the indicative benchmarks. The committee further acknowledged the possibility of further monetary growth on the back of an imminent increase in the money supply.
❖ The committee similarly opined that the monetary and fiscal support, as well as the positive outlook towards the oil market, improved investors sentiment in the equities market, hence increasing the All-Share-Index by 18.33% between the end of March and May 22, 2020.
❖ Further, the committee applauded the reduction in NPLs to 6.58% at the end of April 2020, as against 10.95% in the corresponding period of 2019. The MPC urged the banks to maintain its toolkit of prudential and regulatory measures to ensure NPLs stays below the prudential benchmark of 5.00%.
❖ In terms of the proposed intervention funds, the committee cited that; of the NGN1trn fund targeted at local manufacturing, NGN93.20bn had been disbursed, consisting of over 44 greenfield and brownfield projects. On the NGN50bn fund targeted for households and SMEs, NGN4.10bn had been expended to 5,868 beneficiaries. In a bid to address the dearth of infrastructures, the committee urged the federal government to explore fostering partnerships with the private sector to fund these investments.
❖ On the case of tightening, the MPC felt that a hawkish stance would take a contradictory approach to boost economic growth, thereby weakening aggregate demand, leading to a decline in output, necessary for growth recovery. Although, on maintaining a hold decision, the committee considered the slowdown in trajectory of the economy and the weakening output growth does not bode well for the economy.
❖ On a balance of factors, an accommodative stance should lower lending costs across the board, build credit to the real sector, drive job creations while also lifting aggregate demand.
OUR TAKE
We believe that the shift in the policy rate sends a growth signal to the real sector of the economy. Thus, creating fewer funding pressures on businesses and driving a larger capacity for bank lending. We also note the signalling effect of the MPR is not as strong as it used to be. Given the low-interest-rate environment, we envisage a minimal effect on the treasury market, as assets are already trading below the MPR while bonds (mostly long-end) with yields higher than the MPR will gradually decline, to reflect the current MPR, amid robust participation in the market. In the equities market, a realignment of a portfolio should drive the uptick in the market, owing to the declining yields in the fixed income space.
Greenwich Research.
