The Monetary Policy Committee (MPC) held their second meeting for the year on the 25th and 26th of March 2024. At the end of the meeting, the committee members voted to:
- Increase the Monetary Policy Rate (MPR) from 22.75% to 24.75%.
- Change the asymmetric corridor from +100/-700 to +100/-300 around the MPR.
- Retain the CRR for Deposit Money Banks at 45.00%.
- Adjust the CRR of Merchant banks from 10% to 14%.
- Hold the liquidity ratio constant at 30.00%.
What could this mean for the equity market?
The unexpected decision to adjust rates at this meeting caught many investors by surprise. Given that the market is still adjusting to the previous rate hike, the impact on inflation remains uncertain. It’s important to recognize that changes in interest rates typically take time to translate into observable effects on inflation, meaning that we may not see the full repercussions until the April or May reports are released.
Following the recent rate hike, the equity market has experienced a significant downturn. This decline can be attributed to the well-established relationship between interest rates and the fixed income market. As interest rates rise, fixed income investments become more attractive to investors seeking stability, prompting a shift of funds from equities to fixed income securities.
What impact would this have on companies?
Companies, especially those in manufacturing and consumer goods sectors, are facing significant challenges. Many have reported declines in earnings amid tough business conditions. This can be attributed to the increase in borrowing rates aligned with the rise in MPR, resulting in higher costs of funds. Consequently, this has added pressure to the equity market.
Furthermore, companies across sectors such as manufacturing, industrial, and consumer goods are already having it tough in the business landscape. A thorough review of their full-year results reveals a significant increase in finance costs and operating expenses. With the recent hike in interest rates, borrowing costs are expected to escalate further. As a result, companies seeking additional funds for their working capital will further increase their finance cost.
