Akpata: Growing divergence between MPR & interest rates a challenge

In response to the recent MPC decision to hold rates, Chairman of Skymark Partners, Egie Akpata, highlighted the growing divergence between the Monetary Policy Rate (MPR) and interest rates in the securities markets as a significant challenge. Akpata joined CNBC Africa to provide further insights into the implications of this decision. The decision to maintain all parameters steady came as a surprise to many, considering the recent inflation numbers. Akpata pointed out that the prolonged period of record-high interest rates could have adverse effects on the real sector, particularly businesses relying on bank borrowing. While there was anticipation for a change in interest rates given the favorable inflation numbers, the decision to hold rates for another three months raised concerns about the impact on economic activities. Akpata emphasized the need for a closer look at the inflation data and its implications on monetary policy decisions going forward. He expressed skepticism about the sustainability of current borrowing rates and the challenges they pose to businesses in need of affordable financing. The decision to hold rates has resulted in a growing disparity between market rates and the central bank's stance. Akpata highlighted how market rates have been influenced by factors such as auction calendars set by the Debt Management Office (DMO). Recent T-bill and bond auctions have seen a decrease in rates, despite the MPC's decision. This divergence has led to falling rates in the debt markets, with investors rushing to capitalize on higher yields before they decline further. While this trend is favorable for government borrowing, it poses a challenge for banks in pricing their loans and maintaining profitability. The unchanged asymmetric corridor, with banks borrowing at NPR plus five, creates a pricing dissonance that could lead to a shift away from traditional banking channels. The impact of the rate decision extends to the foreign exchange market, with implications for the stability of the Naira. Akpata raised concerns about the decline in foreign reserves and the reliance on short-term inflows to support the currency. The potential depletion of borrowing options and the departure of portfolio investors could destabilize the Naira in the future. As market dynamics continue to evolve, the uncertainty surrounding the Naira's trajectory remains a key area of focus for investors and policymakers. Looking ahead, the decision to hold rates until the next MPC meeting in May sets the tone for market expectations and government borrowing plans. With a significant deficit projected in the budget, the government faces the challenge of financing its spending requirements. The DMO's strategy to delay borrowing to benefit from lower rates reflects the prevailing market conditions. Despite the MPC's stance, market forces are driving rates lower, signaling a disconnect between policy intentions and market outcomes. As financial markets navigate these complexities, stakeholders will closely monitor inflation trends, exchange rate dynamics, and borrowing dynamics to gauge the future trajectory of the economy.