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LCCI, analysts react to MPC’s decision to hold monetary policy parameters

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By Audrey Lotechukwu and Azuka Christopher

WED 24 MARCH, 2021-theGBJournal- The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) retained policy parameters during its March 2021 meeting with Monetary Policy Rate [MPR] at 11.5%; Cash Reserve Ratio [CRR] at 27.5%; and Liquidity Ratio at 30%.

The Lagos Chamber of Commerce and Industry described the decision as ‘’most appropriate decision at this moment.’’

‘’ We believe sustained intervention efforts of the Bank would further enhance credit flows to the real economy, stimulate output growth and ultimately moderate inflationary pressures,’’ the Chamber said in a note theGBJournal.

But the Chamber is requesting that the MPC gives more attention in its deliberations to the foreign exchange policy because of its profound implications for economic performance and the confidence of investors.

‘’The forex policies are as important as liquidity management concerns.  Foreign exchange framework is key to the price stability mandate of the CBN, it said.

The Chamber notes with concern the divergent positions of both the fiscal and monetary authorities on the country’s foreign exchange policy framework. 

‘’It is important for the fiscal authorities, CBN and Economic Advisory Council to be on the same page as far as the country’s foreign exchange policy framework is concerned. This lack of coherence among policymakers sends a negative signal to the investment community, aggravate uncertainty and undermine the confidence of investors.’’

The preceding did not come as a surprise to analysts at Cordros Research, given that the growing divergence from the CBN’s medium-term inflation target of 6-9% has compelled the Committee to begin a gradual realignment to its primary mandate of price stability.

‘’For us, the Committee’s decision to shift away from its hawkish stance now rests on the outcome of the Q1-21 GDP numbers,’’ Cordros said.

Cordros highlighted the likely impact of the decision on fixed income and equities.

On Fixed Income, Cordros said the MPC meeting’s outcome will not bring about any fundamental changes in the bond market’s trading pattern. They believe bond investors will continue to exhibit aversion for long-duration bonds in the near term.

With inflation expectations still biased to the upside and the DMO’s plan to securitise the Ways and Means Advances still on the cards, they expect investors to continue to demand higher yields to improve inflation-adjusted returns.

‘’Based on the preceding, we think the steepening of the NGN yield curve will persist until inflationary pressures begin to dissipate in the second half of the year or a substantial reduction in the amount and frequency of domestic debt issuances by the DMO.’’

On equities; since the January MPC meeting, domestic investors have sold down their portfolios in response to the rising yields in the FI market. Analysts expect a neutral reaction to the meeting’s outcome, given investors have already priced in the decision and do not expect a reversal in the uptick in yields. 

They think trading in the market will continue to be choppy as income investors continue to cherry-pick dividend-paying stocks. In contrast, risk-averse investors will continue to recalibrate their portfolio towards fixed income instruments.

With the eagerly anticipated MPC meeting out of the way, we now expect investors’ attention to be focused on bond auction results to clarify the direction of yields in the FI market.

The MPC was faced with the dilemma of maintaining an accommodative monetary stance to stimulate economic growth or hiking interest rates to tame rising inflationary pressures and at the end of their deliberations voted to hold all key parameters constant.

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