Experts have said banks will face more risks lending to other banks and to customers as the impact of the rate hike reverberates across key segments of the economy.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday voted to increase the Monetary Policy Rate (MPR) further by 50 basis points to 26.75 per cent from previous 26.25 per cent at its July policy meeting.
The Committee’s decision to raise the policy rate was hinged on their goal to ensure price stability, given the persistent increase in inflationary pressures. Notably, analysts pointed out that the MPC’s interest rate hike was the slowest increase this year, primarily due to an anticipated disinflation trend in the near term.
Reacting to the increase in MPR rate, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said the tweak in MPR was surprising but suggests that the CBN is aggressively dissuading banks from tapping liquidity through the Standing Lending Facility (SLF) window.
“For context, the tweak in the asymmetric corridor to +500/-100bps around the MPR implies that banks seeking to tap funds through the SLF window would have to pay a cost of fund of 31.75% per annum from 27.25 per cent previously,” he said.
He said that for banks with excess liquidity willing to play at the Standing Deposit Facility (SDF) window would now receive 25.75 per cent interest per annum, thereby expanding the negative spread between SLF and Standing Deposit Facility to 600 basis points (bps) from 400bps.
“Based on our assessment of industry data, banks tapped N73.6tn through the SLF window between January and July 2024, representing 8.5 times the size of activities at the SDF window”.
“We expect pressure to mount on banks’ ability to balance risk-return going forward. Secondly, the further hike in the MPR (though arguably compelling) should exert a negative pass-through effect on real sector players, especially in terms of interest expenses on debt funding. Therefore, coupled with the other headwinds such as inflation squeeze and FX volatilities, we expect real output growth to be pressured for the rest of the year,” he said.
He expressed reservations with CBN’s optimism that the 150-day duty-free import window for selected food items would substantially temper food prices.
“Without the Federal Government addressing the rising cost of logistics fueled mainly by elevated energy prices and insecurity, the impact of such policy would be short-lived, at best. Furthermore, there has also not been any formal model announced to show how the beneficiaries of the duty-free window would be monitored to sell the staple items at fair prices across the country,” he said.
Analysts at Cordros Capital, said they expect the MPC to lean towards a neutral monetary policy stance, that is, a wait-and-see approach, in its next monetary policy meeting in September, allowing the impact of previous rate increases to permeate the economy.
“ Additionally, the surge in the government’s borrowing cost following the uptick in fixed income yields is expected to underpin the MPC’s decision to pause its policy rate hikes,” they said.
