By Jeph Ajobaju, Chief Copy Editor
Bond yields dropped 2 per cent a day after the Central Bank of Nigeria (CBN) slashed interest rate, as buyers were caught off guard by the cut, and some wonder if it is enough to grow Africa’s biggest economy.
Most analysts had in January expected rates to be stable till at least the middle of 2019.
The CBN cut its benchmark interest rate by 50 basis points to 13.5 per cent on March 26, the first reduction in more than three years.
The rate had been held at 14 per cent since November 2015 to support the naira and rein in inflation.
On March 27, bond yields dropped from 15 per cent to around 13 per cent across maturities on minor buying interest, traders told Reuters.
They later recovered to 14.15 per cent. The most liquid one-year treasury yield fell 15 basis points to 12.75 per cent.
“The markets opened lower but no one is buying as investors adjust their bids,” one trader said.
Rising bonds, falling stocks
After the announcement of the re-election of President Muhammadu Buhari on February 27, Nigeria’s long-dated bonds denominated in dollar and traded offshore rose as much as 0.8 cents in the dollar to extend a more than 10 cents rally since the beginning of 2019.
But stocks fell to a one-week low in early trades.
The stock index, which opened up 0.12 per cent, turned red to fall 0.18 per cent, its lowest in one-week, on low volumes after mixed trading in the past week because of the election.
Ten-year bond yield fell to its lowest in six months as stocks went south.
The benchmark 2028 bond yield dropped to 14.3 per cent, its lowest since August 2018, from 14.5 per cent the previous day.
It was quoted at 14.75 per cent on February 22, a day before the election.
Yields on government bonds have been falling since December as investors bought debt. Traders said they had seen some buying from offshore funds on February 27.
Analysts had predicted a stock market rally this year if the election passed without violence or other problems. Shares gained on February 25.
Interbank low liquidity
On March 27, traders said low liquidity on the interbank market hampered deals, adding yields have already fallen from as high as 15 per cent last month after the CBN lowered the rates at which it sold treasuries at its last auction.
Banking sector credit doubled to N80 billion on March 26 from the previous day but the amount of maturities due to be repaid between now and August is not sufficient to boost liquidity, traders told Reuters.
Nigeria’s growth is expected to lift to between 2.7 per cent and 3 per cent this year, up from 1.9 per cent last year, CBN Governor, Godwin Emefiele, added when he announced the rate cut in Abuja on March 26.
The stock market, which is beset with worries over low growth, dropped 0.5 per cent on March 27 as brokers say the rate cut is too little to stimulate the economy.
Where will rates settle?
Emefiele said CBN Monetary Policy Committee “felt that given the relative stability in key macroeconomic variables there is a need to signal a new direction, in which case we are talking about being pro-growth.
“This rate cut is meant to signal that there is a need for us to move course a little further. To do so we need to begin to look at money supply, liquidity to push growth.”
The decision emerged from the first MPC meeting since Buhari’s election victory over Atiku Abubakar who had campaigned to float the naira currency.
Reuters quotes traders as saying they expect bond yields to decline at the next MPC session on April 2 due to the rate cut as investors watch out for where the rates will settle at the CBN’s next treasury auction.
The benchmark one-year treasury bill closed at 12.4 per cent on March 25, around the rate at which the CBN issued it at its last auction last week.
Bond buyers had hoped the CBN would start to increase liquidity to improve funding conditions, particularly with election risk out of the way.
Consumer inflation was 11.31 per cent in February year on year, down slightly from 11.37 per cent annual growth a month earlier.
Inflation has been in double digits for three years and the CBN has previously said it was targeting single digit inflation.
Decoding what ‘new direction’ means
“[The rate cut] came as a big surprise, and it suggests policymakers have made a clear decision to ignore their own inflation targets and to focus on providing monetary stimulus,” said John Ashbourne, senior emerging markets economist at Capital Economics in London.
“I doubt that this will do much to boost growth, but it will hit the bank’s credibility with investors.”
Ashbourne said the reference to a “new direction” just as Buhari secured a second term and Emefiele’s tenure as CBN governor is due to end in June could give the impression that the move is in some way political.
Emefiele was appointed CBN boss in June 2014. He could serve a second term of five years, but there is no word yet that Buhari will retain him.
Chief Africa economist at Standard Charted, Razia Khan, said more detail is needed on fiscal and monetary policy intentions in the months ahead.
“It is not clear how much a 50 bps MPR cut really delivers in terms of growth,” she said.