Dear Subscriber,

Investors usually buy on the rumour and sell on the news. This time around, everyone was wrong-footed as the CBN not only moved against the flow but also tightened in a magnitude greater than could have been anticipated (50bps to 27.25%p.a.).

Even the most contrarian analysts expected a 25 basis points increase as the worst-case scenario. The MPC, in a unanimous decision, moved not only the MPR but also sharply increased the cash reserve ratio to 50%.

Markets hate surprises

But the CBN is now finding out that the invisible hand (markets) works more efficiently than the hidden hand (regulation).

The CBN showed that it had guts and was willing to demonstrate its policy and instrument autonomy. But the CBN is finding out that the markets hate surprises and are willing to punish policymakers by moving in the opposite direction.

Stock market up, naira down

Initial reaction to the rates hike was an increase in the market capitalization of the stock exchange by 0.18% on Tuesday and 0.42% on Wednesday, even though there should be an inverse relationship between interest rates and stock prices. More surprising though is that the naira (parallel) is weakening rather than getting stronger. Typically, when interest rates increase, currency strengthens, but this time the naira has fallen from N1,640/$ to N1,700/$. Most analysts believe that the naira should have strengthened, but instead, the naira has lost 1.7% in 24 hours to N1,700/$. The reason for this is the uncertainty surrounding the next Central Bank foreign exchange auction.

But the markets will settle soon and reverse course

Having said this, short-term contrarian moves can only last for a maximum of 72 hours, after which the market will go back to its normal trend.

We expect the stock market to correct and the naira to appreciate.

All of these are discussed by Bismarck Rewane in an interview on the Channels TV News at Ten program.

The video link and slides are attached.

Enjoy your read!