Post MPC Note: MPC Embraces Flexibility

The Monetary Policy Committee (MPC) at the conclusion of its 3rd meeting for the year decided to hold all rates unchanged. More specifically, the Committee decided to;

  • Retain the Monetary Policy Rate (MPR) at 12.0%
  • Maintain the asymmetric corridor around the MPR at +200/-500bps
  • Retain Cash Reserves Ratio (CRR) at 22.5%
  • Keep the Liquidity Ratio (LR) at 30.0%
  • Adopt flexibility of the interbank exchange rate market with a small window of support for critical sector.

More significantly, the Committee eventually moved to address the lingering concern around the exchange rate and the outlook of the local unit which it has left unaddressed for a while by noting the need to embrace a flexible exchange rate regime with modalities to be worked out by the Central Bank in due time.
Our Initial Reaction: Decision Positive for the Economy and Financial Market
We think the decision to retain all other rates, most especially the MPR is commendable given the fact that sharp rising inflation rate remains largely driven by structural bottlenecks in the system. Consequent on the above, yields on fixed income securities are expected to moderate following the decision to hold MPR at 12.0% as against speculation of a likely hike in rates on the back of the pressure on price level which drove inflation to 13.7% in April and resulted in a negative policy real interest rate.

The indication of a flexible exchange rate regime is anticipated to strengthen performance of the equities market. Although the actual impact of the recent move to embrace flexibility in the currency market is difficult to analyse at the moment given that the details of the operation of the planned flexibility is yet to be announced. Nevertheless, we believe the move by the MPC to address the currency market crisis is a step in the right direction as highlighted in our (Pre-MPC Note …Monetary Policy Committee at a Crossroads) published last Friday.

While we await the “modus operandi” of the new FX regime, we maintain that flexible exchange rate policy will go a long way in addressing the current spread between the official/interbank and the parallel market rate.

  • We expect this move to help improve FX supply constraints as foreign investor sentiments improve towards Nigeria as an investment case.
  • We believe FPIs and FDIs which have been staying on the side-line would find their way into the system on the back of foreign investor confidence receiving a boost as the interbank market is reinstated as the official platform for market determined exchange rate.
  • More importantly, it will also create the required liquidity for oil marketers to source FX at the guided rate of N285.00/US$1.00 assumed by PPPRA in its pricing template. In the short term, this will sustain the observed improvement in the petrol market following the move by the NNPC to deregulate of the petrol market.
  • We also believe sentiments for equities market, which had anticipated a currency adjustment move, had been elevated as investors await the “come back” of foreign investors who had earlier exited the market on the back of rigid foreign exchange regime.

Whilst we hope that “Flexibility of Interbank market” is in the true meaning of the phrase, the overall impact of the decision remains dependent on the details of the operation of the new FX rate regime most especially as it relates with transparency issues surrounding the critical sector the Apex Bank will be supporting.