Further interest rate hikes may not adversely impact banking system’s stability, says CBN

Members of the Central bank of Nigeria (CBN) Monetary Policy Committee (MPC) on Tuesday said they were convinced that further interest rate would not adversely impact the Nigerian banking system’s stability.

The committee after a two-day MPC meeting voted to hike interest rate to 18 per cent from 17.5 per cent and retained other rates.   

The voting pattern shows that an aggressive rate hike was entirely out of the conversation at the meeting as 10 members voted to raise the MPR by 50basis points, one member voted to increase the MPR by 25basis points and the remaining member voted to hold the MPR.

The committee called on the CBN to strengthen its regulatory oversight of the banking system to ensure that the industry remains stable and resilient.

The members were concerned about the marginal increase in year-on-year headline inflation in February, primarily due to higher food prices in the period.

Still, the MPC noted that the risks to domestic prices remain high, including: expectations of the PMS subsidy removal, increases in other energy prices, exchange rate pressures, and legacy infrastructure challenges.

Analysts at Cordros Research said: “While there is a possibility of a strained reaction given the weak interest rate transmission to fixed income yields as seen in recent times, we think the outcome of this meeting is likely to trigger further rounds of bearish sentiments across the mid-to-long end of the yield curve, albeit moderately.

“Moreover, we expect an aversion to long-dated instruments to persist due to near-term expectations of a further moderate increase in interest rates. Thus, we recommend investors maintain the strategy of playing at the short end of the yield curve. Notwithstanding, we expect robust system liquidity to be a significant driver of market activities.

“However, the robust liquidity picture is expected thin out over the medium term amid an increase in bond supply. In addition, like in the prior year, we expect continued reliance on the domestic debt market and CBN’s Ways & Means advances in financing the 2023FY budget deficit, as the elevated global yields would make foreign currency borrowings remain expensive in the face of tight global financing conditions.

“Sequentially, we maintain our expectation of an uptick in bond yields over the medium term.” 

On equities market, analysts at Cordros Research said: “The domestic stock market has remained broadly upbeat since the last MPC meeting in January with domestic investors remaining dominant players (87.2per cent market share as of January 2023).

“Accordingly, the ASI Year-to-date return is currently at +7.1per cent (as of 21 March) following positive reactions to the broadly decent earnings delivered by companies during the 2022FY earnings season. We believe the outcome of the MPC, could trigger a realignment of portfolios towards fixed-income instruments if there is a passthrough impact on yields in the FI market.

“As a result, we expect cautious trading from domestic investors in the short term, showing a weak appetite for stocks. With the MPC meeting out of the way, we believe developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse in the near term.”