Afrinvest Weekly Update | Pre-MPC Outlook… Further Tightening on the Cards?
An Extraction of the Afrinvest Weekly Economic & Market Report for March 22nd, 2024
Source: NBS, Afrinvest Research
This This week, we share our outlook for the upcoming Monetary Policy Committee (MPC) meeting slated for next week Monday and Tuesday. Recall that the first MPC meeting for the year concluded with votes to raise the benchmark Monetary Policy Rate (MPR) by 400bps to 22.75%, recalibrate the asymmetric corridor around the MPR to +100/-700bps from +100/-300bps, and move Cash Reserve Ratio (CRR) up 12.5ppts to 45.0%. Given that the hike was implemented in late February, its impact was not noticeable in the latest CPI update which was published in March for price changes in the preceding month.
Specifically, the report indicated that inflation rate advanced for the fourteenth consecutive month by 180bps y/y to 31.7% in February 2024 – a new record high in over three decades based on CBN and NBS data. Meanwhile, data on exchange rate showed improvement as the Naira appreciated by 8.9% and 4.7% respectively to ₦1,453.28/$ (NAFEM) and ₦1,495.00/$ (Parallel market) since the last MPC meeting. Beyond the signaling effect of the hike, the Naira has been supported by improved FX inflows through series of OMO auctions, positive rub-off effects of the recent transfer of NNPCL's account to the CBN (amid favourable oil price), and intensified regulations targeted at curbing speculations.
That said, the anticipated effect of the previous MPR hike on inflation is yet to materialise due to impact lag. For instance, CBN staff project headline inflation to remain on the uptrend to 32.6% y/y in March (Afrinvest projection: 32.2%) pressured by high energy prices, exchange rate passthrough effect, and food supply disruption due to the ongoing Ramadan and lingering insecurity.
On the international front, recent monetary policy meetings indicate a global theme of caution in light of reinflation risks. In the US, the FOMC left interest rates unchanged, with Fed fund rate at a range of 5.25% to 5.50%. Similarly, the European Central Bank (ECB) maintained the main refinancing operations, the marginal lending facility rate and deposit facility rate at 4.50%, 4.75% and 4.00% respectively. In similar fashion, the Bank of England (BoE) held its benchmark rate at 5.25%, leaving Switzerland as the only advanced country to cut rate so far (down 25bps to 1.5%). In Africa, the Central Bank of Egypt postponed its March meeting to allow the unscheduled interest rate hike of 200bps in early February marinate. Meanwhile, Ghana's (to be announced on Monday) and South Africa's (to hold 27 March) apex banks are likely to maintain status-quo.
For Nigeria, we anticipate further tightening of policy rate although other key parameters are likely to be left at current levels. First, we imagine that the committee would prefer a course of action that indicates unwavering commitment to tackling inflation. We project that their assessment of risks from unchecked inflation would take precedence over the potential cost of hiking rates on real sector financing. Notably, resilient GDP data for FY:2023 would likely provide comfort as the economy was up 2.7% y/y despite 225bps jack-up of MPR in 2023. Furthermore, we suspect that the improvement in oil sector performance is reinforcing optimism for firm output expansion in 2024 (CBN: 3.38%; FG: 3.88%, IMF: 3.0%, World Bank: 3.30%), providing legroom for further hikes.
Additionally, the MPC may consider that delays in rate cuts by advanced markets could heighten competition for scarce global capital in developing markets. Except for the US where inflation rose to 3.2% in February, data indicates that major economies continue to make progress in steering inflation lower. In summary, we anticipate between 100-200bps rate hike next week. That said, we recommend a hold decision as a more appropriate path considering the strong interest rate hike less than a month ago. Notably, inflation is driven by monetary and structural factors. While February’s hawkish move gradually curbs worrisome money supply growth (assuming CBN maintains strong stance against unconstrained fiscal interventions and undue real sector interventions), the fiscal authorities must rise to the occasion. This two-pronged approach is necessary to prevent excessive and ineffective utilization of monetary policy for non-monetary inflation drivers.
We therefore suggest urgent and sizable fiscal-sided policy moves to address insecurity around farming regions, review of ineffective logistics network and poor infrastructure for food supply, as well as improved support for the Agric sector in form of access to quality and affordable inputs and tools. Additionally, efforts should be made to address worsening power supply, which poses challenges for both businesses and households, especially with the increasing expenses associated with generating power independently. Overall, policies to enhance productivity in a sustainable manner must be at the forefront of fiscal efforts to improve supply constraints in the economy and tackle structural components of domestic inflation.
Similar to the previous episode where yields on benchmark NT-bills and FGN bonds repriced upwards by 241bps and 80bps to 19.2% and 17.6% respectively, we expect a bearish response to the anticipated MPR hike next week, clearing the path for average yield on benchmark FGN bonds to climb above 20.0%. For equities, we note that bullish sentiment continues to be reinforced by market listings and cherry-picking based on FY:2023 earnings along with positioning for dividend payment. Nonetheless, improvement in fixed-income yields should strengthen the case for rotation out of equities, more so that valuation of some tickers has largely delinked from fundamentals, and dividend yields are underwhelming.