Last week, we projected in our Pre-MPC analysis report that the CBN Monetary Policy Committee (MPC) will leave all its monetary policy variables unchanged by the end of its two days meeting on Tuesday 22nd September 2020.
Our position was hinged on the delicate dilemma faced by the monetary authority, arising from the global shock caused by the COVID-19 pandemic and oil price slump on one hand, and on the other hand, the multi-year-long fault lines in policy choices and/or implementation, poor resource management, and insecurity, all of which has brought the economy into Stagflation (High inflation and unemployment, and GDP contraction).
However, the CBN went for a reduction in both the MPR and the Asymmetric corridor around the MPR, on the basis that the current high inflation in the country was as a result of structural rigidities and supply shocks, and not monetary factors.
In line with our analysis, the MPC in its communique released after the meeting stated that though an increase in the MPR will help stem the rising inflation trend in the domestic economy as well as attracts more foreign investors, such a decision on the other the hand will raise the cost of borrowing to players in the real sector of the economy, and this by extension will stall the drive towards restoring the Nigerian economy to a part of growth following the -6.10% contraction in GDP recorded in Q2’2020.
The CBN also noted that a reduction of the MPR (aside from its positive gains such as signalling of a more accommodative interest rate environment that can help grow the GDP), will increase the inflation rate and the risk of credit crises in the medium term.
Nevertheless, the committee opted for a reduction in the MPR, on the ground that it will support its efforts at pressurizing deposit money banks to lower the cost of credit in the economy, with the expectation that this will help increase productivity and create new employment opportunities which are needed to push the economy out of the impending recession.
In all, the MPC altered two of its policy variables, the MPR, which was lowered by 100bps to 11.5%, and the Asymmetric Corridor around the MPC, which changed from +200/-500bps of MPR to +100/-700bps of the MPR, while retaining the Cash Reserve Ratio (CRR) and the Liquidity Ratio (LR) at 27.5% and 30% respectively.
Likely implications of the policy variables changes on
Interest on Savings deposit:
The reduction in MPR to 11.5% means that the minimum interest rate on savings deposit which was pegged at 10% of MPR at the beginning of this month now translates to 1.15% per annum, as against 1.25% per at the time of announcing the policy.
By implication, this is expected to translate into reduced Interest expenses for the DMBs; a development that is expected to boost earnings expectation of DMBs in the near term.
Fixed Income & Equity Market:
The reduction in the MPR means that yield rates in the money and bond markets are likely to be further pressured as the CBN’s overall expectation is to further lower the cost of capital in the economy.
However, this development, on the other hand, is a potential catalyst for the equity side of the capital market, as blue-chips companies with better dividend yield rates than what is available in the fixed income market will begin to witness buy interest given the current attractive valuations.
Interest on credit facilities:
The reduction in the Asymmetric corridor around the MPR to +100/-700bps means that deposit money banks (DMBs) will now access fund from the CBN through the Standing Lending Facility (SDF) window at a rate of 12.5% as against the previous rate of 13.5%, while banks deposit with the CBN through the Standing Deposit Facility (SDF) window will now only attract an interest rate of 4.5% as against the previous rate of 7.5%.
This implies that DMBs now have fewer incentives to keep more cash in the SDF window as a result of the reduced interest rate. Hence, this gives the CBN the needed legroom to pressure deposit money banks to lower interest rates on credit facilities to the productive sector of the economy and households, given the high Loan-to-Deposit benchmark of 65% that must be satisfied.
Foreign investment flow:
The reduction in MPR to 11.5% at a time inflation rate has risen to 13.22% means a wider negative real interest rate on fixed-income investments. This development (we believe) may trigger further capital flow reversal by foreign investors in the coming weeks, in search of more attractive yield in other climes.
The reduction in the MPR and the Asymmetric corridor means system liquidity will likely increase, and this is expected to stoke up demand-pull inflationary pressure in the domestic economy, as system liquidity remains on the high side.
Gross Domestic Product (GDP):
The monetary policy tweak in conjunction with other fiscal stimulus policies of the federal government is expected to have a positive but minimal impact on the GDP in the near term, as a result of the underdeveloped nature of critical non-oil sectors of the economy which could have helped in achieving organic growth at a time like this when oil market outlook is dovish.