Members unanimously voted to increase the Monetary Policy Rate (MPR) further by 100bps to 17.5% at its first meeting of 2023, representing the fifth consecutive rate hike since the CBN commenced its monetary policy tightening cycle in May 2022. The voting pattern suggests the MPC could be less hawkish at subsequent meetings, as seven members voted to increase the MPR by 100bps, four members voted for a 50bps increase, and the remaining one member voted to increase the MPR by 150bps. Also, the Committee voted to maintain other policy parameters at current levels; the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5%, and Liquidity ratio at 30.0%.
On domestic growth: The MPC did not acknowledge the slow growth in Q3-22 but attributed the consistently positive growth for the eighth consecutive quarter to the enhanced support by the fiscal and monetary authorities to growth-aiding sectors. On the outlook, the Committee expects the domestic economy to continue to grow in 2023, but at a subdued pace, with the CBN projecting the economy to grow by 2.88% in 2023E.
On Inflation: Unsurprisingly, the Committee welcomed the moderation in consumer prices following ten consecutive months of increase as headline inflation moderated by 12bps to 21.34% y/y in December 2022. However, the Committee was concerned about the monthly price increase due to the rise in consumer spending during the festive period.
Cordros’ View
Again, the MPC’s decision to further increase the MPR was in line with our expectations (see report: MPC to Favour Smaller Rate Hikes in the Short Term) as the risks to near-term inflationary pressures remain biased to the upside amid global central banks contemplating lower interest rate hikes. As we expected, the Committee stated that while tightening was its preferred option, the dilemma at the meeting was whether to continue tightening aggressively or moderately. To the Committee, it felt that a moderate tightening is an optimal option needed at the meeting to slow the rate of inflation acceleration without necessarily hurting output. Besides, the Committee was not convinced that the year-on-year moderation in headline inflation in December 2022 (-12bps to 21.34% y/y) was enough to celebrate, citing near-term risks to inflationary pressures, including (1) higher spending relating to the 2023 general elections, (2) lingering PMS scarcity and elevated energy prices, (3) exchange rate pressures, and (4) rising insecurity in the country. Accordingly, the Committee adopted voted to raise the MPR further by 100bps to 17.50% to (1) reduce the negative real interest rates, (2) signal confidence in the effectiveness of its monetary policy direction to rein in inflation, (3) improve financial system stability, and (4) moderate exchange rate pressures.
In the near term, global central banks are expected to slow down on interest rate hiking cycle as inflationary pressures soften, even as labour market conditions remain relatively tight. In the local economy, consumer prices are likely to maintain their slight deceleration in the near term, primarily driven by the favourable base effects from the corresponding periods of the prior year. However, inflation expectations remain high given the prospects of subsidy removal amid the persistent PMS shortages. More disturbing is the potential increased spending usually associated with elections, which may boost short-term spending further and keep broad inflationary pressures intact amidst low productivity. While the election spending is likely to have a short-term boost on economic activities, broad inflationary pressures are expected to keep consumer wallets pressured, neutering the impact of the election spending. Accordingly, the near-term growth outlook remains clouded by increased downside risks amid increased production costs. Consequently, we believe the MPC will be walking on tight ropes to maintain a balance between driving down inflationary pressures and ensuring economic growth is not significantly hampered. Overall, we think that the MPC’s “moderate tightening” tone and voting pattern at the meeting gives a hint that the Committee is likely to embark on a 50bps increase in the MPR at its next meeting, more so that it coincides with the US Fed contemplating smaller rate hikes. Afterwards, we expect the MPC to embark on a stretch of HOLD decisions, in line with the current market expectations of when the US Fed will stop increasing its key policy rate.
Market Impact
Fixed Income: While we believe the outcome of this meeting may trigger further rounds of bearish sentiments across the mid-to-long end of the yield curve, we expect tomorrow’s NTB auction to give more clarity on the direction of yields in the secondary market. Moreover, we expect an aversion to long-dated instruments to persist due to near-term expectations of a further increase in interest rates, albeit slowly. Thus, we recommend investors maintain the strategy of playing at the short end of the yield curve. That said, we expect frontloading of significant borrowings for the year to result in an uptick in bond yields as investors demand higher yields in the face of increased supply. In addition, like in the prior year, we expect continued reliance on the domestic debt market and CBN’s Ways & Means advances in financing the 2023FY budget deficit, as the elevated global yields would make foreign currency borrowings remain expensive in the face of tight global financing conditions.
Equities: The domestic equities market started the year positively as the All-Share Index returned 2.7% as of 24th January, with domestic investors (86.2% market share as of November 2022) remaining the dominant players in the market. Following the recent decision of the MPC, we do not expect a significant change in the market’s trading pattern, especially as the hike coincides with the commencement of the 2022FY earnings season. Thus, we see scope for the market to sustain its bullish momentum in Q1-23 as we believe (1) investors’ positioning in stocks with attractive dividend yields ahead of 2022FY dividend declarations and (2) bargain-hunting activities in value stocks with sound fundamentals will continue to propel market performance. Nevertheless, we believe sensitivity to an uptick in FI yields will remain a downside to market performance in the medium term. Overall, we expect sentiments in the bourse to remain broadly positive until FI yields begin to inch up.
