Why CBN’s 17.5% interest rate hike is bad for Nigeria’s stock market

Market operators have said that the latest hawkish stance of the Central Bank of Nigeria (CBN) to further increase the interest rate to 17.5% would dampen investors’ demand for the equities market and encourage them to navigate towards the fixed-income market. 

This is despite the bullish trend the Nigerian equities market has witnessed since the beginning of the year which saw the year-to-date (YTD) return rose to 2.74% at the close of trading the previous day.  

Recall that the CBN’s monetary policy committee voted in its January 2023 meeting to raise its benchmark interest rate to 17.5% from 16.5%.  

This is the first interest rate hike in 2023 and it suggests that the apex bank is continuing with the hawkish rate policy started in 2022. Recall that the CBN had raised interest rates by a cumulative 500 basis points last year in a bid to tame the rising inflation rate in the country.  

The apex bank took a hawkish stance despite the moderation of the headline inflation rate in December 2022 to 21.34% from 21.47% recorded in the previous month.  

• According to the CBN governor, a marginal decline in the inflation numbers printed in December is not enough to begin to celebrate, which influenced the decision in favour of raising as opposed to a hold or loosening decision. 

What it means for the stock market: The operators who spoke with Nairametrics said that they were surprised to see the latest development when the inflation is already declining.

• They added that as is typical with past data, investors will migrate their financial assets away from equities to money market instruments making the current bullish trend being witnessed since the beginning of the year reverts to bearish activities. 

Market loss: At the close of trading yesterday, the market responded to the hike in interest rates as bearish sentiment drove the local bourse. 

• The NGX All-Share Index closed 0.09% lower to finish at 52,612.55 points. A gain of 0.72% was recorded by Dangote Cement, Access Holdings with +1.12%, and UBA (+2.47%) were submerged by losses in Zenith Bank (-0.41%), GTCO (-0.41%) and NB (-9.90%).  
• Consequently, the year-to-date (YTD) return fell to 2.66%, while the market capitalization dropped N24.59 billion to close at N28.66 trillion. 

What operators are saying

The former President and Chairman governing council of the Chartered Institute of Stockbrokers (CIS) and the Managing Director, Mr Olatunde Amolegbe, reacting to the development in a chat with Nairametrics said the latest hawkish stand by CBN came as a surprise from what is expected.  

• “We had expected a raise of about 50% and not up to 100%. We are in the middle of the campaign season and a lot of spending is going on. They may be looking at inflation rising again. They might be trying to hedge against inflation rising again due to political spending and the eminent removal of fuel subsidies. Political spending and petrol subsidy removal are likely going to fuel and spark inflation again. 
• This is a very aggressive move that is expected to increase the bond yield in the short run and also lead to a drop in stock prices which has started recovering,” he said.  

Executive Vice Chairman of Hicap Securities Limited, Mr David Adonri also in a chat with Nairametrics said when interest rate rise, investors tend to migrate to fixed-income securities. 

He noted that the recent hike will hurt the market, especially on the equity side which just started recovering. 

He stated that it was surprising to see another increase in benchmark interest rate to 17.5% from 16.5% when the inflation is declining,  

• “It is expected that with the turnaround, the CBN is supposed to maintain the old rate. I think why they decided to increase the MPR rate is that they believe the decline in inflation last month was not sustainable and there is a possibility of rising again.  
• Every time there is an increase in interest rate, the yield on bonds and other fixed income securities will rise, financial assets will migrate to fixed income securities which will reduce the demand for equities and further have a run on the shares,” he said. 

Adonri noted that the compensating factor is that the market is in earning season which means that those companies that pay a good dividend will enjoy increased demand for their shares and may defy expectations of a major drop in prices. 

What the data is saying: Whilst the outlook may seem gloomy for stocks as indicated by experts, the data suggest that is not the case in Nigeria.

• The last time interest rates were at unprecedented levels was between June 2016 and February 2019 at 14% flat throughout the period.
• However, stocks posted a positive return of 42.30% in 2017 and will go on to post losses of -17.81% and -14.60% in 2018 and 2019 respectively.
• However, in the dovish years of 2020 and 2021 when MPR averaged 12% (between 13.5% and 111.5%) the all-share index ended both years with a return of 50.03% and 6.07% respectively.
• This suggests asides from interest rates, several other factors determine the direction of interest rates.