Analysts at Lagos-based Arthur Steven Asset Management Limited and Afrinvest West Africa (members of the Nigerian Stock Exchange), on Tuesday disagreed over likely impacts of the decision by the Central Bank of Nigeria (CBN) to cut benchmark interest rates after over three years of retaining it at 14%.
Recall that at the end of its 266th regular and second meeting for the year, 11 members of the CBN’s Monetary Policy Committee (MPC), by a simple majority six to five votes, opted to cut Monetary Policy Rate (MPR) by 50bps to 13.5%; maintain the asymmetric corridor around the MPR at +200/-500bps; Hold Cash Reserves Ratio (CRR) at 22.5%; and Keep liquidity ratio at 30.0%.
Reacting to the decisions of the CBN’s Monetary Policy Committee (MPC) mailed to clients, for example, analysts at ASAM reasoned that quantitative easing as expressed through Tuesday’s cut portends everything good for the overall Nigerian economy, given expected boost to investments, enhance job creation for the mass of Nigerians.
Reducing MPR to 13.5%, the ASAM analysts noted, “is aimed at increasing money supply in the economy, which increases the aggregate demand in the form of increased investment and consumption.
“Quantitative easing will discourage savings and encourage borrowing for spending and investment purposes. This will therefore stimulate economic growth by encouraging banks to make loans available to businesses and consumers. It will also lower unemployment rate and create more jobs for the masses,” they added.
The interest rate cut, they continued, “will encourage investors to move funds to the equities market thereby creating liquidity in the market and hence giving better returns because lower interest rate will lower cost of capital and improve earnings.”
“On the fixed income market, however, quantitative easing pushes bond prices high due to artificially low interest rates,” they further noted.
ASAM’s counterparts at Afrinvest, however warned against any illusion about credit to private sector improving on the back of the rate reduction. They argue that existing “structural bottlenecks and the elevated business risk environment remain drags to credit creation. Price pressures, on the other hand, should also not deteriorate as it has been consistently proven that Nigeria’s inflation is largely cost push.”
They noted that “the MPC is moving back to convention and aligning policy rate to market rates. Currently, the average short-term discount rate settled at 12.7% (implying an average yield of 13.6%), which aligns with the new MPR at 13.5%.”
No one should be deceived into believing that an easing cycle has begun, they told their clients, even as “policy stance remains intact considering global interest rate development and the desperation to sustain and retain flows.
“The CBN can always resort to OMO to achieve the objective of attracting and retaining capital flows.
The magnitude of rate cut, they continued, should result in a muted impact on yields, even as already, short term rates are trending downwards post elections as foreign flows continue to be attracted to local high yielding instruments and must be sustained from the CBN’s perspective.
They argued further that “barring any short-term shock in the oil market, market conditions would have forced short-term and long-term yields (at least) 200bps lower even if MPR was retained at 14.0%” anyway.
Afrinvest expects the initial reaction to be a soft moderation in average bond yields in the fixed income market, at least 50bps to 100bps, and up to 200bps yield decline from current levels in the long-term.
“Fund managers trading above five-year term to maturity on the yield curve would benefit the most. The short-term fixed income market (OMO and T-Bills) may also experience slow activities in the short-term as we expect possible further drop in discount rate (at least 50bps).”
While noting the fundamentally weak sentiment in the equities market, which they do not expect to change immediately on account of the rate cut, they drew attention to the slow but gradual recovery in the economy, which may not support an overtly bullish earnings expectation in the short-term.
“Yet, we believe the market has been far compressed and remains attractive for equity investors. Post-2019 Presidential election conclusion, market has lost on 16 of 22 days so far traded. Current market valuation (7.9x) relative to Egypt (16.6x), Kenya (11.3x), Ghana (22.9x) and South Africa (17.0x) shows clear undervaluation; we are convinced the next phase is a bull run,” they added.