MPC increases MPR by 50bps to 26.75%

The Monetary Policy Committee (MPC) maintained its hawkish stance, raising the monetary policy rate (MPR) by 50 basis points (bps) to 26.75% from 26.25%. This marks an increase of 800 basis points over the last four meetings. Additionally, the committee adjusted the asymmetric corridor around the MPR to +500/-100 bps from +100/-300 bps, while keeping other monetary parameters unchanged (CRR for deposit money banks at 45%, CRR for merchant banks at 14%, and liquidity ratio at 30%). The adjustment in the asymmetric corridor will raise the standing lending facility to 31.75% from 27.25% and the standing deposit facility to 25.75% from 23.25%.

These measures aim to address persistent inflationary pressures, in line with the CBN’s price stability mandate. Notably, headline inflation surged for the 18th consecutive month, reaching a 28-year high of 34.19% in June. Month-on-month inflation also reversed its three-month downward trend, rising to 2.31% from 2.14% in May.

The committee observed that although prior rate hikes have moderated demand-pull inflation, increasing food and energy costs, driven by heightened insecurity in the food belt and high transportation costs for farm produce, are putting upward pressure on prices. This situation is further exacerbated by middlemen who finance smallholder farmers to aggregate, hoard, and move farm produce across borders. Despite these challenges, the committee is optimistic that prices will moderate in the near term due to continued monetary tightening, the harvest season, and recent fiscal measures, including the 150-day suspension of tariffs on some key staples.

Implications

The MPC's decision has notable implications for various agents and segments of the Nigerian economy.

Increase in the MPR

Pros:

·         Savings: The interest rate on savings is expected to rise to 8.025% (30% of MPR), encouraging a stronger savings culture.

·         Fixed Income Market: Higher interest rates will increase the yield on fixed-income securities. At the last auction, the 364-day treasury bill stop rate rose by 86 bps to 22.1%.

Cons:

·         Borrowing Cost: The cost of borrowing for individuals, corporations, and the government will increase. According to the CBN, debt service costs gulped about 74% of the Federal government’s retained revenue in Q1’24, straining the already limited revenue.

·         Stock Market Performance: The stock market is likely to experience a bearish trend as investors shift their portfolios towards fixed-income securities to benefit from higher yields.

Adjustment in the Asymmetric Corridor

·         Standing Lending Facility: The increase will deter banks from borrowing from the CBN, tightening liquidity within the banking system. This will result in more interbank lending activities, driving up short-term interbank interest rates.

·         Standing Deposit Facility: The rise could encourage banks to deposit more funds with the apex bank, thereby reducing the funds available for lending to the real sector due to the high risk of defaults in a challenging macroeconomic environment.

Recommendation

Given the value erosion caused by high inflation, preserving and growing funds becomes essential. Some investment classes that can help mitigate the impact of inflation include fixed-income securities, mutual funds, etc

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