Last week, Mr Godwin Emefiele presided over the Monetary Policy Committee (MPC) meeting for the first time since his reappointment as Governor of the Central Bank of Nigeria (CBN).
At the end of the extensive two-day meeting, the MPC opted to maintain the recent cut in Monetary Policy Rate (MPR), holding it at 13.5%.
An overview of the economy: The MPC decided to keep the rates constant, at least for the next two months before reconvening in July. One obvious conclusion from the committees’ consideration, is that Nigeria’s economy is fragile and surrounded by degrees of uncertainties. While commenting on the slow growth rate of 2.01% recorded in the first quarter of 2019, the MPC rightly noted that the economy’s actual output remains below potential.
Considering the necessity of Nigeria to stay on the growth path after the economy just got out of recession, loosening the MPR would have been a good tool to open up the economy for further growth investment opportunities.
However, just as several analysts predicted, the MPC maintained a hold and this may entail continued slow growth in the economy for the second quarter of 2019.
Why MPC held rates constant: According to the MPC, maintaining the monetary policy rate at its present level was essential for a better understanding of the momentum of growth before determining any possible modifications.
Expectedly, other factors that influenced the Committees’ considerations include ongoing trade wars between US and major trade partners, financial fragilities in a number of countries, the debt-constrained fiscal operations and the volatility in the oil market.
Meanwhile, the MPC stated that the decision to hold rates constant is largely dependent on the recent increase in headline inflation, which may further be triggered with further loosening. The MPC noted that tightening will limit investors access to credit.
The MPC and the Stock Market: The MPC rightly noted that some of its members felt that it was desirable to loosen MPR in order to aggressively stimulate growth, restart the capital market activities, and increase lending at lower rates; which would ultimately stimulate domestic aggregate demand.
Essentially, considering the continued bearish trend in the equities market with the All-Share Index declining by 8.14% to 28,871.83 index points on May 17, 2019, in the last five months, lowering the MPR would have indeed restarted the stock market.
It should be noted, however, that growth in the stock market has been specifically attributable to new listings in the market, specifically the MTN listing.
Nigeria’s top 5 banks — FBN, UBA, GT Bank, Access Bank, and Zenith Bank (FUGAZ) — have collectively borne the brunch of MTN’s listing. Since the 16th of May, all 5 stocks have either lost or stayed relatively flat. This is because investors are not just interested in paying a sizeable premium for the stocks; not with the new bride in town.
Upshots: The emergence of MTN’s listing on the stock exchange appeared to be a short term boost to the ailing market. However, cautious trading still persists in the stock market, with most trading sessions ending in negative territories last week.
Although, the market has shown signs of growth due to MTN Nigeria share price. However, the NSE once again ended last Friday’s trading session in negative territory as MTN Nigeria Plc makes top losers’ list for the first time since its NSE debut. Specifically, the All Share Index closed at 30, 881.29 basis points, down 1.89%.
A cut in the MPR, as some analysts expected, would have led to an influx of funds into the market. Loosening the MPR would have been the right stimulant to restart the bearish stock market, and improve demands for stocks.