In brief
- The newly reconstituted Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), led by Governor Yemi Cardoso, convened its first MPC meeting this week amidst heightened expectations of a hawkish policy direction.
- Although this meeting marks the start of scheduled MPC meetings for 2024, the new CBN administration which effectively commenced in September 2023 had implemented a number of reforms in the FX market whiles tweaking the monetary policy transmission mechanism. However, we observed that the forex reforms implemented so far have been heavily focused on boosting FX supply while the persistent Naira liquidity overhang continues to fuel FX demand to overwhelm the limited forex supply.
- Against the backdrop of persistently loose Naira liquidity, the 12-member MPC expectedly delivered a 400bps hike in the monetary policy rate (MPR) to 22.75% (market expectation: 21.25%), amongst other liquidity management measures.
- Our assessment of the CBN Governor’s policy tone since his appointment suggests a strong leaning towards reviving foreign portfolio investment as a critical source of forex inflows. We think this posture will keep the MPC hawkish as the market requires higher interest rates to complement the ongoing FX reforms. The MPR hike raises our hopes for a continued upturn in domestic yields, especially along the back-end of the T-bill curve into the medium-term segment.
- However, the reduction in the lower bound of the asymmetric corridor effectively neutralizes the impact of the MPR hike on the CBN’s Standing Deposit Rate (SDR) which remains at 15.75%. This will likely keep short-term deposit rates largely unresponsive to the MPR hike, limit the CBN’s capacity to effectively drain Naira liquidity and undermine the monetary policy transmission mechanism. Despite the optically hawkish hike in the CRR to 45.0%, the CBN’s past daily deductions from banks’ cash reserve above the previous 32.5% CRR will mute the liquidity-restraining impact of the latest hike. This suggests the need for more aggressive Open Market Operation (OMO) in the near-term to further tighten Naira liquidity.
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