Nigeria’s Central Bank Sends Conflicting Signals to Markets with Interest Rate Hike

Market experts have said the Central Bank of Nigeria led monetary policy committee is sending mixed signals to the nation’s financial markets on its police direction.

On Tuesday, the monetary policy committee increased monetary policy rate by 25 basis points to 18.75% while the Cash Reserve Ratio was left unchanged at 32.5 per cent and the liquidity ratio at 30 per cent. The asymmetric corridor was narrowed from +100/-700 basis points to +100/-300 basis points.

According to Abiola Rasaq, former Economist and Head of Investor Relations at United Bank for Africa Plc, “Rather than stem inflationary pressures and encourage FX inflows, I believe the hike may lead to inadvertent volatility in the market. Yields may gradually rise; even so, such market relations may be short-lived, pending clarity in the broader monetary policy stance.

“The rally in the equity market may take some breather, as a transitory rise in yield environment and overall volatility may subdue the risk on sentiment, which has spurred the strong 28.8percent year-to-date return”.

The 25 basis points (bps) hike in the MPR sends a negative and contradictory message to the market regarding the monetary policy authority’s direction.

He says, “The increase in MPR by 25 basis points (bps) sends a negative and conflicting signal to the market on the policy direction of the monetary policy authority. The CBN, the administrative body and secretariat of the policy committee, has recently signalled a renewed accommodative stance, which may be justified given the liberalisation of the FX market.

“Notably, there has been a reduction of CRR of merchant banks, which is commendable and aligns with the fundamentals of this wholesale banking model, compared to commercial banking. In addition, the CBN is streamlining the CRR of commercial banks to ensure the mandatory deposits are not unduly punitive. These actions release more liquidity to the system and are indeed expected to encourage banks to lend more to the real sector,” Rasaq said.

The market had already reacted to presumed shift in monetary policy with 150bps decline in Sovereign yield but the 25bps rate hike creates confusion.

“Interestingly, the market has steadily reacted to this presumed shift in monetary policy expectations, with some 150bps decline in the Sovereign yield environment. However, this new 25bps hike in the policy rate sends a confusing signal. The argument for this hike may be justified by the rising inflation and continued depreciation of the Naira, albeit this new hike may not address these problems now.

“Hopefully, there would be a clearer picture on monetary and fiscal policy orientation once a substantive CBN Governor is appointed and we have the full complement of Executive Cabinet when Ministers are appointed,” he said.