‘Positive for FX market’ — financial experts support MPC decisions

Economic and financial experts have lauded the decisions of the monetary policy committee (MPC) of the central bank at its first meeting in 2024.

On February 27, 2024, the MPC, headed by Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), increased the monetary policy rate (MPR) by 400 basis points (bps) to 22.75 percent.

Also, the asymmetric corridor was adjusted to +100 bps and -700 bps from +100 bps and -300 bps.

The apex bank also increased the cash reserve ratio (CRR) from 32.5 percent to 45 percent, and retained the liquidity ratio at 30 percent.

Commenting on the decisions of the MPC, Philip Anegbe, chartered financial analyst at CardinalStone Partners Limited, said efforts by the committee as well as the CBN will increase confidence in the foreign exchange (FX) market.

“The MPC justified its aggressive monetary stance with the need to tackle inflationary pressures. In our view, the continued rise in money supply was another important driver of inflation in Nigeria, which validates the sharp increase in CRR,” the firm said.

“Elsewhere, the adjustment of the asymmetric corridor may be aimed at incentivising banks to move from their current net-borrower position to net depositors at the CBN discount window.

“On the FX front, the CBN is focused on restoring the damaged confidence in the foreign exchange market. In our view, it appears that confidence is gradually returning to the market, with the CBN stating that about c.$2.0 billion in foreign investment subscribed to the government instruments issued this month.”

Anegbe said the renewed investors’ confidence is likely to be boosted by the CBN’s disclosure that $400 million of the outstanding $2.2 billion FX backlog has been repaid.

According to the analyst, “the strong hawkish actions of the CBN are likely to cartelize higher yields in the fixed-income market in the near term”. 

For the equities market, Anegbe said the increased interest rate is less compelling for valuation and could further stoke “bearish sentiment in the market”.

“Nevertheless, sell-offs may present decent entry opportunities in fundamentally sound stocks, such as those with positive interest sensitivities to their margins, robust cash and low leverage,” he said.

“Savvy investors may also look for tactical opportunities to earn dividend income as full-year numbers begin trickly in March/April and onwards.

“The recent moves are also positive for the FX market, with associated inflows likely to support CBN’s recommencement of dollar sales to the BDCs.

“We, therefore, see latitude for improvement in FX liquidity and potential naira gains in the near to medium term.”

‘DECISIONS WILL STRIKE A TONE WITH INVESTORS ‘

On his part, Omobola Adu, senior economist, BancTrust & Co., said the hike in MPR will address inflation and improve FX supply.

Adu said the rate decision follows the recent efforts by the CBN to return to orthodox monetary policy and address the functionality of the FX market, “which we believe will likely increase credibility to the governor’s policy direction and independence”.

“The outcome of the meeting confirms the move towards inflation targeting and the much-needed liquidity tightening to stem the depreciation of the naira,” he said.

“While some of the drivers of headline inflation (29.9% in January 2024) are structural, a tighter monetary policy supporting price discovery in the FX market and an appreciation of the naira could ease imported and domestic food inflation, the latter through lower energy and fertiliser cost.

“Similarly, improvements in FX liquidity and lower cost pressures could help to offset some of the negative impacts tighter monetary conditions might have on the non-oil sector, particularly on manufacturing, construction, and trade.”

The economist said there may be an improvement in foreign currency liquidity in the economy with the $400 million of the FX forward backlog that has been cleared, as well as the recent commencement of dollar sale to bureau de change (BDC) operators.

“Aside from the outcome of the meeting, the confident no-nonsense delivery from the governor will strike a tone with domestic and foreign investors as well as the banking sector where regulatory oversight is expected to be much tighter under Governor Cardoso,” Adu said.

He said for liquidity to continue to increase and for Nigeria to remain attractive to investors, there must be support from the fiscal arm to moderate the challenging road ahead, due to risks of mass social unrest.