Experts laud MPR reduction, say industrial operators to benefit

Experts have lauded the Monetary Policy Committee for the bold step taken to reduce the nation’s monetary policy rate from 14% to 13.5%, say fast moving consumers goods and other productive sectors stand to gain more as lending rate will be re-priced.

After holding the monetary policy rate at 14 percent since July, 2016, the monetary policy committee of the Central Bank of Nigeria taper on rate as macroeconomic indicators enter green zone.

Jide Famodun, Senior Consultant at LSintelligence is off the opinion that lending rate will be repriced, just as some money market instruments.

This will reduce burden of increase cost currently face by the operators in the fast moving consumers sector as well as other productive segments where input cost has always been determined by the lending rate.

“What the rate cut means is that the committee is providing incentives for the growth in productive base from local economy perspective.

Though, we are not there yet but this is a right move in the right direction. I call it for step to getting things right in the economy”, Jide Famodun said.

Complementing the Senior Consultant stance, Ogochukwu Ndubuisi, Head, market relations and strategy said that banks will start refocusing efforts to creating credits because MPC has just sent a signal that yield in the fixed income market won’t support deposit money banks profitability for long- especially in the second half of the financial year 2019.

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“I see banks refocusing efforts at expanding loan book in 2019 compare with what has been since 2016, perhaps. The reduction in monetary pricing rate, just like input cost would be adjusted for lending rate. Since yield in money market is already declining, banks would start creating interest earnings assets using loans”, Ogochukwu added.

At the end of the second meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria, which was concluded today, 26th March 2019, the Committee decided, in perhaps the last MPC communique of Governor Godwin Emefiele, on a vote of 6 to 5 to reduce policy rate by 50bps to 13.5%. The Committee in an unexpected twist, cited the need to shift policy focus to supporting growth amongst other considerations.

“In our earlier Pre-MPC report, we noted that “we expected the MPC to hold all policy rates at current levels in next week’s meeting, although the case for monetary easing has become compelling”. However, our expectations were off as the Committee favoured a rate reduction”, Afrinvest said.

In the firm review, it observed that since the July 2016 tweak in MPR and the subsequent use of short-term market rates to anchor monetary policy, the analysts at the firm have continuously expressed their views on the redundancy of the benchmark rate.

“We think the MPC is moving back to convention and aligning policy rate to market rates. Currently, the average short-term discount rate settled at 12.7%, which implying an average yield of 13.6%), which aligns with the new MPR at 13.5%”, Afrinvest remarked.

However, the firm said it is not distracted to believe an easing cycle has begun; rather, the analysts think policy stance remains intact considering global interest rate development and the desperation to sustain and retain flows.

According to Afrinvest; the CBN can always resort to open market operations (OMO) to achieve the objective of attracting and retaining capital flows.  In addition, credit to private sector is not expected to improve on the back of rate reduction as structural bottlenecks and the elevated business risk environment remain drags to credit creation. Price pressures, on the other hand, should also not deteriorate as it has been consistently proven that Nigeria’s inflation is largely cost push.

Although the decision of the 123rd MPC meeting was not anticipated by the market, the magnitude of rate cut should result in a muted impact on yields. Already, short term rates are trending downwards post elections as foreign flows continue to be attracted to local high yielding instruments.

Evidently, foreign capital inflows must be sustained from the CBN’s perspective and barring any short-term shock in the oil market, market conditions would have forced short-term and long-term yields (at least) 200bps lower even if MPR was retained at 14.0%.

Commenting on impact on fixed income market, Afrinvest said; “We expect the initial reaction to be a soft moderation in average bond yields, at least 50bps to 100bps, but long-term expectation should see up to 200bps yield decline from current levels. Fund managers trading above 5-year term to maturity on the yield curve would benefit the most. The short-term fixed income market, OMO and T-Bills, may also experience slow activities in the short-term as we expect possible further drop in discount rate at least 50bps”.

On equities market trading, sentiment remains fundamentally weak in the equities market; this is not anticipated to change in the immediate on rate cut. The gradual recovery in the economy is slow paced and may not support an overtly bullish earnings expectation in the short-term.

“Yet, we believe the market has been far compressed and remains attractive for equity investors. Post-2019 Presidential election conclusion, market has lost on 16 of 22 days so far traded. Current market valuation (7.9x) relative to Egypt (16.6x), Kenya (11.3x), Ghana (22.9x) and South Africa (17.0x) shows clear undervaluation; we are convinced the next phase is a bull run”, Afrinvest reviewed.

Experts laud MPR reduction, say industrial operators to benefit