‘MPR Cut Signals Plan to Keep Low Yields Fixed Income Market’
Aftermath of the Monetary Policy Committee benchmark interest rate cut, Cardinalstone says reduction signal the apex bank’s intention to sustain dovish orientation in the coming months.
The investment noted that the reduction in the benchmark interest rate cut support the Central Bank of Nigeria’s plan to maintain low yields fixed income market.
It would be recalled that the Committee surprised market watchers with a 100 basis points reduction in its key policy rate to 11.5% at the end of its two-day policy meeting yesterday.
Analysts had explained that there is a case for a second MPR cut in 2020, said they saw legroom for another 100 basis points reduction in the monetary policy rate at the end of the ongoing meeting.
Nigeria’s Q2’20 GDP growth of – 6.1%, which vastly underperformed CBN’s growth forecast of -1.0%, suggests that the apex bank misjudged the depth of the COVID-induced crisis and could therefore reassess its policy measures.
Besides, leading indicators suggest only an anemic pickup in economic activity in the months after the GDP release.
Notably, Manufacturing PMI increased to 48.5 points in August from 41.1 points in June but still represented a fourth consecutive fall in the level of monthly economic activity.
The non-manufacturing index fared even worse, with macro ramifications compounded by exchange rate pressures, rising unemployment, and higher food prices.
In its note, Cardinalstone said after adjusting the policy rate only three times in its prior 25-meetings, the committee has now reduced the MPR twice in 7 months in 2020 in response to current growth concerns.
In addition to this rate cut, the asymmetric corridor around the MPR was adjusted to +100/-700bps from +200/-500 bps.
“This corridor adjustment suggests that the CBN will now borrow from banks at MPR minus 700bps (3.5%) and lend to them at MPR + 100 bps (12.5%).
The committee noted that conventional monetary tools are unlikely to appropriately tackle inflation, which has been primarily pressured by structural supply-side factors.
Cardinalstone noted that this revealed intentions to tackle inflation through sustained development finance initiatives and direct interventions aimed at reducing supply bottlenecks.
According to Cardinalstone, the reduction in MPR is likely a signal of the apex bank’s intention to sustain a dovish orientation in the coming months.
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The investment firm recalled that the MPR cut of March 2019 preceded several accommodative administrative measures including the introduction of the LDR policy, the review of standing deposit facility guidelines, and the exclusion of non-bank institutions and individuals from OMO market.
It said for banks, the decision to reduce the MPR would further moderate cost of funds, which, in isolation, should ordinarily be positive for earnings.
But analysts noted that simultaneous reductions in interest on loans and asset yields are likely to offset the pass-through from the reduced cost of funds on net interest margins (NIMs).
Although, Cardinalstone stated that the growth inducing rate cut could signal opportunities for reduction in lending rates and, consequently, support spending.
“We assess that banks are likely to remain guarded regarding credit creation in the near term due to broad macroeconomic concerns and fear of higher impairments charges”, Cardinalstone remarked.
Explaining further, the investment firm expressed that this cautious lending may translate to lower than expected credit creation for the real sector.
“We believe direct interventions could be accelerated to provide some latitude for growth stimulation”, it noted.
Yet, analysts said the limited scale of the intervention programs still underpins its expectations for a prolonged U-shaped recovery from the current growth setback.
Cardinalstone however explained that lower interest rates are conventionally supportive of equity markets as lower finance costs may provide support for earnings.
“The MPC’s decision signals its intention to maintain low yields in the fixed income space.
“The CBN may look to implement this through a combination of administrative measures and strategic liquidity management in the near term”, Cardinalstone stated.
Negative returns have persisted in the fixed income market as inflation rose for 12-months straight before it printed at 13.32% in August.
In its pre-MPC note, Cardinalstone had noted that a rate hike unlikely despite recent surge in inflation.
It explained that the Committee had uncharacteristically prioritised output growth over other policy objectives of price and exchange rate stability amidst the current crisis.
Despite the expected trajectory of inflation over the next 12 months, Cardinalstone had predicted that the MPC may decide to leave rates low in the interim since supply-side and legacy insecurity issues cannot effectively be tackled by rate hikes.
‘MPR Cut Signals Plan to Keep Low Yields Fixed Income Market’
