CBN hawkish bias to inverse yields, quarantine N900bn from Banks Vaults

Experts have said that the apex bank hawkish bias on cash reserve ratio (CRR) requirement would reverse negative yields, though about N900 billion would be quarantine from Banks vaults.

Given the Committee’s decision to increase CRR in a bid to tame system liquidity, we foresee a possible reversal in yields in the near term, WSTC’s analysts said.

The Monetary Policy Committee of the Central Bank of Nigeria www.cbn.gov.ng after a two-day meeting to deliberate on issue that will affect the performance on the economy in a vote of 9 to 11 members agreed to increase the cash reserve ratio (CRR) by 500 basis points (bps) to 27.5%.

Average yields on fixed income instruments have been on decline the same time when the nation’s headline inflation rate surges. This led to negative real return on investment in the market.

In its reaction, Afrinvest, a leading investment banking firm headquartered in Lagos said increased cash reserve ratio by the MPC of the CBN would quarantine about ₦855.3 billion from banks vaults.

Increased CRR is coming at the time when the CBN directed lenders to raise loan as proportion of deposits to 65% as it pursues economic growth agenda.

But analysts at WSTC Securities Limited are of the view that the hike in CRR would curtail credit to the real sector.

Commenting on the issue, Consultants at LSintelligence Associates held that this is a dilemma for lenders as their abilities to create credit is limited to amount available to them from deposits collections and other sources like borrowings.

“CRR limits available fund available to lenders. LDR directive demands for credit creation to stimulate economic growth. Thus, of 72.5% of deposits attracted by lenders, banks are expected to make 65% available to borrowers”, the Consultants said.

In the first quarter on 2020, about N4 trillion is expected to hit the economy from matured financial instruments.

“CRR hike is the MPC way to curb monetary inflation”, Afrinvest analysts observed.

Meanwhile, MPC maintained status quo on other policy parameters. The monetary policy rate (MPR) was at 13.5%, liquidity ratio – 30% and asymmetric corridor at +200bps/-500bps around the MPR.

The Committee noted that the increase in loan-to-deposit ratio (LDR) and Open Market Operation (OMO) restriction has raised liquidity level while the land border closure continues to push inflation.

The National Bureau of Statistics (NBS) inflation report for December 2019 shows that average increase in price of goods and service perched at 11.98%. This is highest point reached in the last 30-month according to chart reading.

Analysts at Afrinvest highlighted that with expected OMO maturities of about ₦4trillion in the first quarter of 2020, the Committee expects that the CRR increase should restrain system liquidity.

This is on the back of the fact that a large chunk of these maturities can no longer access the OMO market following the restrictions of Pension Fund Administrators (PFAs) and other local investors.

“This CRR increase is expected to quarantine between N812.6 to N855.3 billion from the banks’ vaults given total deposits ranging from N16.2 to N17.1 trillion as at September 2019”, Afrinvest analysts held.

However, analysts at WSTS Securities Limited said they expect the CBN heterodox policy to continue to inform the yield direction.

They added that given the low yield environment, we expect increased activities by the corporates in the money market by way of raising new debt capital and refinance existing issues.

Given the Committee’s decision to increase CRR in a bid to tame system liquidity, we foresee a possible reversal in yields in the near term, WSTC’s analysts said.

In assessing the impact in the equities market, analysts said year-to-date, the All-share index has rallied by about 10% on the back of renew interest by the domestic investors, given the negative yield on money market instruments.

“We expect the Committee’s adjustment to the CRR to curtail credit to the real sector. Nonetheless, we expect the current stocks valuation to be supported by the attractive dividend yields relative to the money market yields”, Analysts said.

As per impact on FX market, analysts said the pressure in the FX market is expected to ease given the Committee’s hawkish bias on the CRR.

“Though the FX reserves have been on the decline, we expect the CBN continued intervention in the I&E window to stabilize the exchange rate in the near to medium term”, WSTC said.

PanAfrican Capital relates that as a result of consistent rising of the inflation rate over the last four months, we did not expect loosening of MPR.

However, the decision of the MPC to increase CRR was not expected due to the CBN’s efforts to increase credit to the real sector.

Meanwhile, the committee believes that its decision to increase CRR from 22.5% to 27.5% is to mop up excess liquidity in the system as this will help to address the recent monetary induced inflation.

“In our opinion, we do not believe that the decision of the MPC to increase CRR will fully address the rising inflation as other fiscal policies, such as increase in VAT to 7.5%, closure of land borders and the implementation of the new minimum wage will contribute significantly to upward trend of inflation rate in the months ahead”, PanAfrican Capital analysts said.

CBN hawkish bias to inverse yields By JULIUS ALAGBE

 

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