Pre MPC & Analysts Opinion: May increase key policy Rate Further by 100%

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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to meet on the 20th and 21st of November after failing to have its September policy meeting, following the appointment of the new CBN Governor.

Since the last MPC meeting in July, the monetary policy space has changed rapidly, given some orthodoxy introduced by the CBN, particularly since the beginning of October.

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The significant changes include (1) removing the maximum limit on the Standing Deposit Facility (SDF) and (2) OMO auctions.

In the following paragraphs, we discuss these monetary policy measures since the July policy meeting and their feed through into our expectations when the Committee meets on 21st November.

After about eight months of hiatus, the CBN eventually auctioned OMO bills on 10th August. Despite the high subscription level relative to the offer (Bid-offer ratio: 2.1x), the stop rates averaged 12.49% across the 96-day (10.00%), 187-day (12.98%), and 362-day (14.49%) bills – exceptionally higher than 8.50% mean level at the December 2022 auction.

However, after this action, the CBN did not conduct another one until 30th October, where it sold NGN400.00 billion, with the 365-day bill closing at 17.50% (annualised: 21.20%). The CBN auctioned another OMO bill two days later, selling instruments worth NGN77.20 billion.

The stop rate averaged 15.36% across the three tenors, with the 365-day bill closing at 17.98% (effective yield: 21.91%). Irrespective of how frequent the OMO auctions become going forward, we think the aim is to serve dual functions of (1) mopping up system liquidity and (2) attracting FPIs. On (1), as system liquidity dries up because of the frequent OMO auctions, local yields will increase, making naira assets more attractive.

Supporting the notion of mopping up system liquidity, on 26th October, the CBN quietly removed the NGN2.00 billion maximum limit the banks can deposit on an overnight basis under the SDF.

Recall that we flagged the previous limit as a downside risk to ensuring the effectiveness of narrowing the asymmetric corridor around the MPR to +100/-300bps (previously: +100/-700bps) at the July policy meeting.

Thus, with the removal of the limit, the SDF averaged NGN278.99 billion (prior average: c. NGN55.00 billion), weakening banking system liquidity and inducing higher overnight lending rate (22.9% as of 16th November) amid CRR and bond auction debits.

On inflation, domestic price pressures sustained their uptrend, settling higher at 27.33% as of October (vs July: 24.08% y/y | September: 26.72% y/y), with pressures stemming from both the food (+88bps to 31.52% y/y) and core (+73bps to 22.58% y/y) baskets.

Elsewhere, currency pressures remain intact, with local players remaining the key drivers of the volumes in the Nigerian Autonomous Foreign Exchange Market (NAFEM) since the beginning of the year. However, we understand that offshore investors are beginning to show some interest, possibly due to the OMO auctions and growing optimism that the CBN has started to deliver some of the outstanding FX forwards.

We think the foregoing will significantly impact the Committee’s decision at its November policy meeting.

Notably, we believe that further rate hikes will send a strong message that the apex bank is not relenting in its inflation fight, particularly as near-term inflation expectations are tilted to the upside, potentially reaching a 28.02% y/y peak in December.

Besides, we think that maintaining the MPR at current levels will not be synchronous with the lingering increase in the market interest rates. Thus, to align with the recent market interest rate increases, the Committee will likely favour a further increase in the MPR more so that the (1) MPR remains the key signalling tool for market interest rates and (2) inflationary pressures have remained intact.

Consequently, we expect the MPC to increase the MPR by at least 100bps at its November policy meeting.

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