Futureview’s Boss, Others review impacts of 13 percent Lending Rate on Capital Market, by Samuel Mbadugha

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Futureview’s Boss, Others review impacts of 13 percent Lending Rate on Capital Market, by Samuel Mbadugha

Top investment analysts have reviewed the likely impacts of the hike in the Monetary Policy Rate (MPR) by 150 basis point to 13 percent from 11.5 percent by Central Bank of Nigeria (CBN) and posited that it would trigger volatility in the short run but the market would bounce back.

The CBN’s governor, Godwin Emefiele, yesterday, announced the new MPR, perhaps the apex Bank’s last option to tame ravaging inflation and deliver its core mandate of price stability. However, the Monetary Policy Committee (MPC), retained other parameters as Cash Reserve Ratio (CRR) still stands at 27.5 percent, Liquidity Ratio, 30 percent and Asymmetric Corridor, +100 bp -700 bp.

Emefiele explained that at a time like this, the apex bank had to apply monetary policy that would work in opposite direction as hike in lending rate would affect growth of the economy.  But he maintained that the increase in the lending rate would have more impact on the non-priority sector as there would be development support for the priority areas.

“ Tightening monetary policy will help moderate the inflation trend and improve the real Gross Domestic Product (GDP). It will reinforce investor confidence and moderate spread of capital flight. Rising inflation is a major concern to other countries. For instance, inflation rate in the United States is currently 8.3 percent, Euro countries, United Kingdom, 9, percent and India, 7.7 percent.”, said Emefiele.

How 13 percent MPR will affect the Capital Market- Analysts
Trading on NGX has been bearish due to profit taking and anxiety over the outcome of the meeting of MPC. Following the announcement of increase on the MPR yesterday, NGX All-Share Index plunged further, and the market depreciated by 1.82 percent to close at 51,949,64 points.

The Group Managing Director, Futureview Group, Mrs Elizabeth Ebi, told The Kernel that the 13 percent nominal anchor was a bit  devastating. According to her, it will lead to massive sell-off on the Capital Market as speculators would always look for an asset class with prospects of superior returns.

“ The CBN has just increased the lending rate from 11.5% to 13%. The impact of the new MPR would be a bit devastating on all Financial Assets. Bond yields would increase,  leading to lower Bond prices, Stocks’ valuation would decrease, leading to sell-offs and lower values for a limited period.

“ This new rate would force Investors to readjust, take profits, and enter back into the market at a later date, causing  value stocks  and stocks with Strong fundamentals to rebound in another couple of months.

“ Most analysts use the dividend discount model to value stocks and  one of the components of the denominator in this model  and the model used for pricing  Bonds is dependent on  MPR rate which has an inverse relationship with Stock Value and Bond Value.”, said Ebi.

The Chief Executive officer, Wyoming Capital, and Partners, Tajudeen Olayinka explained that the development was not unusual, and the impact would be temporary on the Capital Market. He stated that a securities market had  self-correcting mechanism that would ultimately lead to an equilibrium between the money market and the capital market.

“ The impacts on the Capital Market will be temporary. The market will correct itself after the initial sharp reaction. One of the initial fallouts is how the quoted companies shall adjust to the cost implications of the increase on MPR. But later, the money market and capital market shall come into equilibrium.  There is nothing to worry about.”, says Olayinka.

Commenting on how to curb the rising inflation, the founder, Centre for Promotion of Private Enterprise (CPPE), Dr Muda Yusuf said “Government  should ddress the security concerns causing disruption to agricultural activities ; reform the foreign exchange market to stabilize the exchange rate, reduce volatility and stimulate forex inflows.”

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