Stock Market Investors’ Lose N1.49tn in Two Days over Interest Rate Hike

Kayode Tokede

The stock market segment of the Nigerian Exchange Limited (NGX) dropped by N1.49 trillion in two days following the hike in the interest rate.

The Monetary Policy Committee (MPC) on Tuesday, increased the Monetary Policy Rate (MPR) to 22.75 per cent from 18.75 per cent, which saw the stock market witnessing negative sentiment as investors are now shifting to the fixed income market.

When the MPR hike was announced on Tuesday, the stock market dropped by N773 billion, trigged by investors’ sell-off in fundamental stocks.

Also, the stock market yesterday extended its negative sentiment, dropping by N720.57 billion in market capitalisation to N54.317 trillion, bringing investors’ total loss in two days to N1.49 trillion.

The MPC members after the two-day meeting in Abuja, had increased the asymmetric corridor to +100 basis points /-700 basis points (Previously: +100 basis points /-300 basis points).

The members also voted to increase the CRR to 45 per cent from 32.5 per cent; and retained liquidity rate at 30 per cent.

The CBN Governor, Olayemi Cardoso after the MPC meeting stated that the committee’s decisions were centered on the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations.

“Members were concerned about the persistent rise in the level of inflation and emphasised the Committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation.

“The Committee, however, acknowledged the trade-off between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation,” he had added.

As the stock market extended its losses, the share prices of the likes of Guaranty Trust Holding Company Plc, (GTCO), Zenith Bank Plc, United Bank for Africa (UBA) among others declined.

For instance, GTCO share price dropped by 8.86 per cent from N39.50 per share it opened for trading this week to N36.00 per share, while Zenith Bank closed trading at N32.45 per share, dropping by 8.07per cent from N35.3 per share it opened for trading this week. 

In addition, UBA’s stock price closed trading yesterday at N20.50 per share, a decline of 13.9per cent from N23.80 per share it opened for trading this week.

Reacting over the MPC decision, Prof. Uche Uwaleke of the Department of Banking & Finance, Nasarawa State University, said jerking up the MPR by 400 basis points in one fell swoop was simply an overkill.

According to him, “Why not by 200 basis points since they have another opportunity to meet next month and review impact? They didn’t stop at MPR, they also jerked up the CRR to 45 per cent which at the previous level of 32.5per cent was among the highest in Sub-Saharan Africa.”

He noted that the CBN Governor had assured that the policies of the bank would be evidence-based.

He explained further that, “Which empirical results support this aggressive move? I pity the real sectors of the economy.

“The implication is that for every deposit in the bank, CRR takes 45per cent of it while the liquidity ratio takes 30per cent. So, it is only 25 per cent of the deposit that banks can lend.

“This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government, and asset quality of banks.

“Expect banks to quickly reprice their loans with negative consequences for non-performing loans and financial soundness indicators.

“By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non-monetary factors driving it, output is bound to shrink

“So, expect lower GDP numbers especially from Agric and Industry sectors as well as a surge in unemployment levels. This is not a welcome development,” he added.

On their part, a group of analysts at Cordros Research said, “Before the meeting, we noticed that the increase in yields in the fixed-income market reduced interest in equities, particularly among domestic institutional investors.

“Following the unexpected 400bps hike in the MPR by the MPC, we anticipate a further negative impact on the equities market performance in the short term. Indeed, the stock market closed with a 1.4per cent decline today, likely due to negative sentiment from investors, as rising fixed-income yields typically reduce the appeal of equities.

“Overall, the MPC’s hawkish stance is expected to further heighten risk-off sentiments in the local market, as domestic investors, who make up the majority of market participants (c.92.0per cent as of January 2024), may opt for safer assets amid rising fixed income yields.

“Consequently, we anticipate a prolonged bearish market trend driven by yield movements and the uninspiring corporate earnings reported thus far.”

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