Low Liquidity Expected to Dampen Impact of Lower Rates

Not so surprising for us, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at the end of its meeting yesterday lowered the Monetary Policy Rate (MPR) for the second time this year by 100bps to 11.5%. Also, the committee voted to reduce the asymmetric corridor around the MPR to +100/-700bps from +200/-500bps and to maintain the Cash Reserve Ratio (CRR) at 27.5% and Liquidity Ratio at 30%. Beyond signaling an accommodative posture, the committee cited the need to complement the CBN’s commitment to sustain the trajectory of the economic recovery and reduce the negative impact of COVID-19. Also, they expect the liquidity injections from the downward review of the MPR to stimulate credit expansion to the critically impacted sectors of the economy and offer impetus for output growth and economic recovery.

Looking beyond the actual decision, the MPC recognition of the impact the constrained liquidity in the banking system bodes largely well with our view. As mentioned in our Pre-MPC note (See report: Balancing FX Stability and Moderating Economic Contraction), beyond actual nominal interest rates, the cost of funds across the banking system is adjusted higher by the CRR impact to arrive at a CRR weighted cost of funds. As such, we stated that a gradual refund of CRR will have more positive impact on rates in the interim. While the downward adjustment of the MPR and further downward review of the standing lending facility (SLF) should suggest cheaper funds for DMBs accessing the CBN window (with SLF rates adjusted lower by 200bps to 12.5% from 14.5%), the CBN sterilization of banks CRR (through unusual debits and LDR punitive measures) already signals minimal interest from banks in taking cheap funding from the apex bank. Without any doubt, a downward adjustment of effective CRR compared to a lower SLF rate, will be more favorable to banks.