CBN Keeps MPR 12%
The Central Bank of Nigeria (CBN) has decided to keep the MPR at 12.0%, which is not surprising, given my analysis yesterday. It has also decided to maintain the status quo by keeping the Naira trading at between N150 - N160 to the dollar and the cash reserve ratio at 8% while the liquidity ratio remains 30%. The committee has also told the market that they would keep an eye on the fiscal stance of the Federal Government and respond appropriately whenever the need arises.
The Central bank sent a signal to the market today, that they were not going to increase interest rates, when they conducted an open market operation before coming out with the decision. This must have prompted the rally in the stock market as the NSE Index surged by 0.70%. My belief is that the rally is not fundamentally driven as the earnings yield of the 30 most capitalized stocks on the exchange, accounting for 90% of the total market capitalization, stands at about 6.7% while the dividend yield is at about 3.0%. One year treasury bills currently sell at 16.0% and above.
No right thinking fund manager will invest heavily in equities at this time. Petrol prices have just risen by 50% with no significant improvement in electricity or road network in Nigeria. Cost of doing business will definitely rise but the end consumers are going to be resistant to any price increase in goods and services to match the increase in cost. Companies are, therefore, going to have to share the increase in cost with consumers, which will reduce profit margins in the short term while we watch what the Government does to improve infrastructure.
Unemployment rate has reached a record high of 10.4% as at December 2011 in the Eurozone; they will definitely not be in any mood to buy the Nigerian growth story at this time so I expect the lull in the equity market to persist in the interim.
With inflation rate at 10.30% and one year treasury bills yielding over 16.00%, this will be a very good time to lock in a positive real rate of over 5.30%. This kind of opportunity does not come all the time and I don't expect the yield curve to remain inverted forever.
While I am happy that interest rates were not raised by the Central bank, it is not yet uhuru for equities in Nigeria.