CBN July MPC meeting decisions drive yield explosion

Jul 31, 2023|Yomi Ajayi

Key questions:

Nigeria’s monetary policy committee voted to raise its key benchmark rate by 25bps to 18.75% to tame inflation and stimulate investments. How did the market react?
Given the outlook for higher inflation, what can we expect from the MPC going forward?

At Nigeria’s fourth monetary policy committee (MPC) meeting of 2023, and the first under President Tinubu, the MPC voted to hike rates (albeit moderately) by 25 basis points (bps) to 18.75%.

In line with our expectations for a moderate hike at the end of the two-day meeting on Tuesday, 25th July, the MPC also narrowed the asymmetric corridor to +100/-300 (versus +100/-700) basis points around the MPR. Other monetary parameters were left unchanged.

In his first stint as the chair of the MPC, Folashodun Shonubi, the acting Central Bank Governor, reinforced the committee’s pledge to rein in escalating inflation and close the negative real interest rate gap, aiming to bolster investor confidence.

To put things in perspective, this rate hike represents an unprecedented eighth consecutive hike since the CBN entered hawkish mode in May 2022. Moreover, the increase in the rate the CBN pays on excess cash Nigerian banks park with it (i.e. narrowing the asymmetric corridor) represents the first time it's been tinkered with it since September 2020.

Market reaction

Buoyed with ample liquidity stemming from a record ₦1.9 trillion in Federation Account Allocation Committee (FAAC) allocations (although just ₦900 billion was shared by governments), investors demanded higher rates at the treasury bill (T.bill) auction last week.

As such, stop rates across all tenors of the T.bill auction on Wednesday increased by an average of 462 bps, with the steepest increase seen in the 1yr T.bill.