MPC Maintains Aggressive Policy Position Due to Stubborn Inflation

Yesterday, the Monetary Policy Committee (MPC) concluded its 289th meeting. At the press briefing, the committee’s Chairman, Godwin Emefiele, announced the committee’s decision to raise the Monetary Policy Rate (MPR) by 100bps, bringing it to 17.5%. The committee also voted to retain the asymmetric corridor at +100/-700 basis point around the MPR and the Cash Reserve Ratio (CRR) at 32.5%, while retaining the liquidity ratio at 30.0%.

In its first meeting of the year, the committee members unanimously agreed to raise the benchmark rate. Although consumer prices rose 21.3% y/y in Dec-22 (vs 21.5% in Nov-22), policy makers did not consider the 13bps decline convincing enough to HOLD or LOOSEN policy. The Chairman noted that persistence in rate hikes (+600bps since May-24) has yielded dividends and policy loosening at this time would be counterproductive. However, there was no consensus on the extent of the hike. While some policy makers argued for a mild 50bps hike so not to hamper economic growth, hawkish members argued for a 100/150bps hike on the basis that double-digit inflation was already hurting growth and is well above the 9.0% ceiling. Members also considered the importance of narrowing the negative real interest rate margin. Therefore, CBN opted to push aggressively until inflation is tamed.

Finally, at the press briefing, the Chairman maintained that the CBN’s 31-Jan deadline for the return of old naira notes will not be extended. He stated that CBN has received N1.3 – 1.5trn over the exercise and expects to recover in excess of N2.0trn after the deadline. This is in the bank’s effort to constrict currency in circulation for the efficacy of monetary policy. Going forward, we expect the hawkish policy decision to contribute to a slowdown in equities in the short run. Also, we expect the decision muddy the outlook for the fixed income market. On one hand, robust system liquidity and healthy maturity inflows will raise demand for fixed income instruments. On the other hand, investors will likely begin to price in the rate hike at subsequent primary auctions. Overall, we reckon the unexpected aggressiveness of the MPC will create a volatile fixed income market for the rest of the quarter, with the yield curve likely to record a bear flattening (short term interest rates rising faster than long term rates).

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