Chinwendu Obienyi
Following the decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to reduce the Monetary Policy Rate (MPR) from 14 per cent to 13.5 per cent, some market analysts are of the view that the move will dampen foreign investments in the nation’s stock market while some are of the opinion that there would not be foreign outflows in the medium term.
The MPR, which is used to determine bank lending rates and the cost of credit for borrowers, had been held at a record high of 14 per cent since July 2016 when it was hiked by 200 basis points from 12 per cent.
The CBN Governor, Godwin Emefiele, who announced the decision of the MPC at the end of a two-day meeting in Abuja, explained that while the MPR was reduced to 13.5 per cent, the committee decided to retain the Cash Reserves Ratio (CRR) at 22.5 per cent, the liquidity ratio at 30 per cent; and the asymmetric window at +200 and -500 basis points around the MPR.
Emefiele added that the decision to reduce the rate was taken in the overall interest of the economy, as there was a need to have a refocus on monetary tightening. This, he stated, would help to increase the level of credit from the banking sector to businesses.
However, analysts who spoke to Daily Sun in separate interviews, noted that the magnitude of rate cut should result in a muted impact on yields, adding that sentiment remains fundamentally weak in the equities market and is not anticipated to change in the immediate on rate cut.
Nigeria’s stock market, which is beset by worries over low growth, appreciated albeit, marginally by 0.01 per cent on Thursday as stockbrokers said the rate cut was too little to stimulate the economy. On the other hand, investors have lost N19 billion
Analysts at Afrinvest in an emailed note said 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, adding that it expects initial reaction to be a soft moderation in average bond yields to at least 50 basis points to 100 basis points while long-term expectation should see up to 200 basis points yield decline from current levels in the fixed income market.
“Evidently, foreign capital inflows must be sustained from 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) 200 basis points lower even if MPR was retained at 14 per cent. 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 equities 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,” they said.
For his part, Senior Research Analyst at Capital Bancorp Plc, Victor Chiazor, said the interest rate cut will not in any way threaten foreign investments as Nigeria’s parameters regarding its foreign reserves, GDP growth and inflation figures suggest that the country is moving in the right direction.
His words: “The US-Feds recently decided that there would not be any further rate hike for 2019. This meant that interest rates will not hit up to 3-4 per cent this year and so it will still be the same 2.25 and 2.5 per cent. So with that position of no rate hike, we might not see that much of investment flow from Nigeria to the US or to other advanced economies.
“Secondly, in terms of returns, Nigeria still ranks among the highest in the fixed income market, money market and treasuries. Outside all these, the risks have significantly reduced compared to last year when no one knew who was going to win the presidential election. But with the election out of the way, it is seen that Nigeria is still working, our reserves are still in order, oil prices above our budget benchmark and with the US signalling no further hike in rate, I think now was the best time to drop rates and I do not think there would be significant outflows in the medium term.”