CBN policy reversal: Interest rates, Bond yields rise


Nigeria’s financial markets have been hit by the full impact of policy reversal which Central Bank of Nigeria, CBN, announced two days ago with interest rates and bond yields spiking, while stock market went down. The apex bank had raised its benchmark Monetary Policy Rate, MPR, to 12 per cent from 11 per cent, while also increasing the Cash Reserve Ratio, CRR, to 22.5 per cent from 20 per cent at end of the Monetary Policy Committee, MPC, meeting in Abuja on Tuesday, barely four months after the committee had reduced all the rates. The immediate implication of both rate changes was increased interest rates and returns on money market investment instruments as well as tightening of money supply. Consequently, yields on the benchmark 20-year bond rose 55 basis points (bps) to 12.7 percent just as the 10-year yield climbed 45 bps to 12.65 percent yesterday. The yield on five-year paper, the most liquid maturity, gained 41 bps to 11.7 per cent. Rise in inter-bank interest rates Similarly, inter-bank interest rate rose sharply as banks quoted 10 per cent on the overnight lending market, over 100 per cent jump from Tuesday’s 4.8 percent before the policy reversal. Treasury executives told Vanguard that lending to commercial customers have also recorded rates hike with prime lending rates tending towards 25 per cent, up from average 18 per cent, while other categories of lending may attract as much as 35 per cent interest rate. The stock market received fortune reversal as dealers weigh in the implication of the policy change on market liquidity coupled with profit takings. Consequently the market which has seen four straight days of gains one of the best in recent weeks, reversed to a 1.19 per cent loss as bear run took over yesterday. Commenting on the stock market development dealers at Afrinvest West Africa, a Lagos based investment house, said: ‘‘Nigerian equities market returned to the red today (yesterday), which did not come as a surprise as investors were bound to take profit after four consecutive days of gain amid weak macro-economic conditions and uninspiring deliberations from the recently concluded MPC meeting. “Sell offs by investors across board resulted in the 1.1 per cent decline in the All Share Index, which settled at 25,736.92 points”. The investment actions of money dealers, according to the treasury executives, was to channel their funds to the most profitable and safest investment outlet which happens to be placement with the CBN at a yield of 7.0 per cent. Surprisingly however, there was the foreign exchange market recorded only a slight depreciation in the value of the local currency as Naira traded at N325/ USD yesterday in the parallel market, down from the week’s opening range of N322- N324. The CBN Committee was largely silent on exchange management and rates. Financial institutions disagree with CBN Some financial investment institutions have reacted sharply to the apex bank’s decisions at the last MPC with most of their positions running counter to the CBN’s. Analysts at WSTC Financial Services Limited stated: “we believe the higher nominal anchor rate and the liquidity tightening effect of the 250 basis points increase in the CRR should drive yields higher in the fixed income market. “This notwithstanding, we expect the recent change in Standard and Poor’s B+ credit rating outlook to negative from stable, with the possibility of a downgrade in the near term to support demand for higher yields, considering the increase in risk premium”. With a considerable level of disagreement with CBN analysts at Afrinvest stated that “the decision of the MPC to tighten monetary policy was against the run of play as it came against the broad analyst consensus of a hold on all policy rates. “Afrinvest Research had projected    100bps increase in MPR to 12.0% in our 2016 outlook but we are particularly surprised that the MPC would be taking the tightening course this early into its easing mode; especially given that;   1) the pressure on consumer prices, as admitted by the committee, is as a result of structural and cost push factors which we believe could worsen if cost of funds  go up with policy tightening and foreign exchange shortages are not addressed;   2) the suggestion that increase in banking system liquidity is fundamentally driving the pressure on exchange rate is not also subject to fact as we have continued to see high subscription at CBN inter-bank auctions despite intermittent OMO mop-ups conducted;   and 3) exchange rate certainty has as much impact on foreign capital inflows as interest rate competitiveness and the current tightening is too mild to compensate for the exchange rate risk.”

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