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NIGERIA MONETARY POLICY COMMITTEE - MPC fans the hawks with twin-tightening

MONETARY POLICY DECISION
MPC fans the hawks with twin-tightening
Yesterday, the Monetary Policy Committee (MPC) voted to raise the Monetary Policy Rate (MPR) by 150bps to 15.50%. In addition, the Committee raised the Cash Reserve Ratio by 500bps to 32.50%. These rate actions are in line with our H2’22 expectations (Monetary Outlook: More rate hikes loom) for interest rates, as the apex bank, under the leadership of the current CBN Governor, has tinkered with more than one policy rate during seasons of monetary policy normalization.
Dual action on campaign eve The global backdrop remains challenging as the lingering Russia-Ukraine war spurs elevated inflation levels across the globe. With the United States Federal Reserve (US Fed) retaining its hawkish pattern, investors are fleeing from riskier assets (including emerging and frontier economies like Nigeria) into safe-haven assets (US treasuries). Earlier in the year, the MPC premised its HOLD decision on Nigeria’s low exposure to monetary policy normalization in advanced economies. Its initial argument was that Nigeria did not benefit from the liquidity glut of 2020. However, in recent times, we have observed a paradigm shift in the MPC’s policy direction from an absolute pro-growth standpoint to a pro-investment standpoint, as the Committee emphasizes the need to improve the real rate of return. To address this objective, the apex bank raised both the Monetary Policy Rate and the Cash Reserve Ratio. While a higher MPR induces higher fixed income yields, a higher CRR removes liquidity from the banking system. As this restrictive CRR policy constrains the quantum of money available for credit creation and bids at fixed income/foreign exchange auctions, both imply an upward repricing of interest rates on loans, higher yields on fixed income instruments, and reallocation from the equity market to the fixed income market as rates inch higher.