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MPC remains aggressive, hikes rate by 150bps
(Source: CardinalStone Research, Date: 21-May-2024)

MPC remains aggressive, hikes rate by 150bps

After the two-day policy meeting, the Monetary Policy Committee (MPC) maintained a hawkish stance, hiking the monetary policy rate by 150bps to 26.25%. The decision was necessitated by the need to rein in stubbornly elevated inflation, which printed 33.7% in April and continues to coast at a 28-year high. Nevertheless, the CBN acknowledged and interpreted the recent moderation in MoM headline inflation as a positive signal. 

Furthermore, providing additional support to the MPC's decision is the robustness of economic activities, with the PMI sitting in the positive territory since the start of the year.

On the FX front, the committee highlighted that the recent FX volatility can be ascribed to the interplay of demand and supply dynamics, which is particular to any freely functional market system. In our view, we see legroom for naira appreciation in the near term due to expected FX inflows from the World Bank ($2.25 billion). The World Bank facility comprises $1.50 billion in Development Policy Financing and $750.0 million in Program-for-Results financing. Further accretive benefits to FX liquidity will likely stem from the balance of the $1.05 billion loan from the AFREXIM bank and the government's plan to issue an FX-denominated domestic bond.

Accessing the market impact, we expect the rate hike to further fuel bearish sentiment in the equities market, as investors will likely rotate to high-yielding fixed-income instruments. Nevertheless, we expect to see increased sentiments in low-leverage stocks and those that have a positive correlation with interest rates (e.g. banks).


CardinalStone Research

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