‘Policy Rate Cut Unlikely To Move Yields in Fixed Income Market’

  • Central bank cuts rate to 12.5% – the first since March 2019 and the largest since 2016
  • Lower rate expected to boost lending and reverse recessionary trend, as inflation risk takes back seat
  • Rate cut largely inconsequential to the domestic fixed income market as liquidity generally drives rates

Analysts at Tellimer have said the monetary authority decision to slash the policy rate by 100 basis points is unlikely to move yields in the fixed income market.

In its equity note, analysts at the firm positioned that the rate cut is largely inconsequential to the domestic fixed income market as liquidity generally drives rates.

MarketForces recalled that The Central Bank of Nigeria (CBN) unexpectedly cut its benchmark lending rate to 12.5% from 13.5% last week.

The decision, according to analysts is to stimulate growth following the downturn brought on by the coronavirus pandemic and sharp falls in crude oil prices.

Analysts told MarketForces that the rate cut would shift investors attention into the equities market as due to widening negative return on yields from government instrument.

However, Tellimer said in a note that this rate cut takes Nigeria closer to negative real rates, as inflation rate stands at 12.34% as against the MPR at 12.5%.

Tellimer’s equity research analysts stated that the MPC decision came as a surprise as the central bank has closely monitored rates for the last two years to curb inflation, support the naira and attract foreign investors to its debt market.

“Considering the high and rising inflation which settled at 12.34% in April – the highest in more than two years.

“Also, recent naira devaluation, the CBN clearly appears to be more worried about growth.

“…trying to stop an even deeper recession than inflation risks, which might suggest further cuts are possible over the coming quarters”, Tellimer explained.

According to the expert, this move was targeted at avoiding deeper recession.

Yields in Fixed Income Market
‘Policy Rate Cut Unlikely To Move Yields in Fixed Income Market’

“The lower rate is expected to stimulate credit expansion to critical sectors, which should, in turn, encourage employment, revive economic activity and stimulate economic growth.

“However, we note that there might be questions about the effectiveness of the monetary policy transmission mechanism in boosting growth in Nigeria.

“Then, the extent to which it can really counteract the huge negative terms of trade shock from lower oil prices”, Tellimer stated.

According to the CBN, decision to cut rates was unanimous as all 10 members of the MPC voted for a rate cut.

Specifically, CBN said 7 members voting for a 100 basis points (bps) cut, 2 voted for a deeper 150 bps cut and 1 voting for 200 bps cut.

Although the 100 bps rate cut should see the CBN’s Standing Lending and Deposit facilities (SLF and SDF) fall to 14.5% and 7.5%, respectively.

This means that banks can access cheaper funding for liquidity shortfalls in the CBN’s lending window.

However, overall lending rates might not come off significantly as inter-bank market rates (OBB and overnight rates) will continue to be determined by the level of system liquidity.

Nigeria’s Q1 20 real GDP meanwhile (measured at basic prices) recorded a growth of 1.87%, although this was down by 23 bps from Q1 19 and by 68 bps from Q4 19.

Tellimer held that a sharper deterioration in activity is expected in Q2 due to the impact of the lockdown, which disrupted both supply and demand, and lower oil prices.

The impact of which would be expected to continue to play out in subsequent quarters.

Analysts recall that earlier this month, the finance minister had alluded to the economy potentially contracting by as much as 8.9% in a worst-case scenario analysis on the back of a plunge in crude prices.

Though, the International Monetary Fund (IMF) expects a 3.4% contraction in the gross domestic products in 2020.

The fall in oil prices has resulted in severe revenue shortfall for Nigeria, Tellimer’s analysts stated in the note.

Crude accounts for about 80% of foreign currency earnings with the government slashing its budget and increasing borrowing.

Just last month, Nigeria secured US$3.4 billion in emergency funding from the IMF.

‘Policy Rate Cut Unlikely To Move Yields in Fixed Income Market’

 

 

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