Commenting on the decisions of the MPC, Philip Anegbe,
chartered financial analyst at CardinalStone Partners Limited, said efforts by
the committee as well as the CBN will increase confidence in the foreign
exchange (FX) market.
“The MPC justified its aggressive monetary stance with the
need to tackle inflationary pressures. In our view, the continued rise in money
supply was another important driver of inflation in Nigeria, which validates
the sharp increase in CRR,” the firm said.
“Elsewhere, the adjustment of the asymmetric corridor may be
aimed at incentivising banks to move from their current net-borrower position
to net depositors at the CBN discount window.
“On the FX front, the
CBN is focused on restoring the damaged confidence in the foreign exchange
market. In our view, it appears that confidence is gradually returning to the
market, with the CBN stating that about c.$2.0 billion in foreign investment
subscribed to the government instruments issued this month.”
Anegbe said the renewed investors’ confidence is likely to
be boosted by the CBN’s disclosure that $400 million of the outstanding $2.2
billion FX backlog has been repaid.
According to the analyst, “the strong hawkish actions of the
CBN are likely to cartelize higher yields in the fixed-income market in the
near term”.
For the equities market, Anegbe said the increased interest
rate is less compelling for valuation and could further stoke “bearish
sentiment in the market”.
“Nevertheless,
sell-offs may present decent entry opportunities in fundamentally sound stocks,
such as those with positive interest sensitivities to their margins, robust
cash and low leverage,” he said.
“Savvy investors may also look for tactical opportunities to
earn dividend income as full-year numbers begin trickly in March/April and
onwards.
“The recent moves are also positive for the FX market, with
associated inflows likely to support CBN’s recommencement of dollar sales to
the BDCs.
“We, therefore, see latitude for improvement in FX liquidity
and potential naira gains in the near to medium term.”
‘DECISIONS WILL STRIKE A TONE WITH INVESTORS ‘
On his part, Omobola Adu, senior economist, BancTrust &
Co., said the hike in MPR will address inflation and improve FX supply.
Adu said the rate decision follows the recent efforts by the
CBN to return to orthodox monetary policy and address the functionality of the
FX market, “which we believe will likely increase credibility to the governor’s
policy direction and independence”.
“The outcome of the meeting confirms the move towards
inflation targeting and the much-needed liquidity tightening to stem the
depreciation of the naira,” he said.
“While some of the
drivers of headline inflation (29.9% in January 2024) are structural, a tighter
monetary policy supporting price discovery in the FX market and an appreciation
of the naira could ease imported and domestic food inflation, the latter
through lower energy and fertiliser cost.
“Similarly, improvements in FX liquidity and lower cost
pressures could help to offset some of the negative impacts tighter monetary
conditions might have on the non-oil sector, particularly on manufacturing,
construction, and trade.”
The economist said there may be an improvement in foreign
currency liquidity in the economy with the $400 million of the FX forward
backlog that has been cleared, as well as the recent commencement of dollar
sale to bureau de change (BDC) operators.
“Aside from the outcome of the meeting, the confident
no-nonsense delivery from the governor will strike a tone with domestic and
foreign investors as well as the banking sector where regulatory oversight is
expected to be much tighter under Governor Cardoso,” Adu said.
He said for liquidity to continue to increase and for
Nigeria to remain attractive to investors, there must be support from the
fiscal arm to moderate the challenging road ahead, due to risks of mass social
unrest.
