By Emeka Anaeto, Economy Editor

The Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN,  held its second meeting of the year early this week, March 21   and 22, 2016, amidst some adverse developments since the meeting that preceded this week’s, which held in January, 2016.

Among the adverse developments are the sharp decline in gross domestic products, GDP, steep rise in headline inflation rate, turbulent foreign exchange market and sharp depreciation in the Naira value at the parallel market.

More important   was the negative outcome of some monetary policy measures the committee had taken in the past three consecutive meetings spanning over six months, chiefly, the expansionary liquidity management measures in favour of real sector lending, and the foreign exchange controls.

The committee reviewed recent domestic, international and financial developments, including challenges facing the Nigerian economy in the near to medium term.

At the conclusion of the meeting, the committee voted to review the monetary policy rate, MPR, upward from  11 per cent to 12 per cent. It also increased the cash reserve ratio, CRR, upward from 20 per cent to 22.5 per cent, while maintaining the liquidity ratio at  30 per cent with an asymmetric corridor of  plus 200 basis points and   minus 700 basis points.

MPR is the benchmark interest rate which determines all lending rates, with banks adding their profit margins on the benchmark rate to fix their prime lending rates. CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserve deposits with the CBN.

Liquidity Ratio is the given portion of bank’s deposit that the bank must hold in cash against the amount it uses to do business.

MPR is basically a tool for controlling and managing cost of funds and interest rates while CRR is basically used to control money supply and ultimately the inflation. Liquidity Ratio is basically a safety net policy to cushion and protect banks and the depositors from adverse drop in the liquidity of banks.


In overall the MPC decisions have signaled a major policy reversal as the apex bank had mid last year begun easing supply of money as a means of reflecting the economy and propping up GDP which had recorded significant quarter-on-quarter and year-on-year decline.

Stimulating economic activities

CBN had expected that a lower MPR and CRR would release cash into the banking system and enable the banks to do same into the economy, specifically channeled to the real sector to stimulate economic activities and targeted growth sectors.

With the increases yesterday, the apex bank appears to have admitted a policy failure and hence a reversal to monetary tightening.

In the first place, the basic mandate of the CBN is maintenance of price and exchange rate stability.

The basic reason for the increase in MPR yesterday was to starve off the negative effect of the recent spike in inflation rate to 11.4 per cent from 9.6 per cent. Inflationary pressure is a basic sign of price hikes, or upward price instability, contrary to CBN’s basic mandate.

But then, at the previous 11 per cent MPR was yielding negative returns on monetary investments, a situation which would automatically discourage savings and financial investments. Certainly this would necessitate the upward review above the headline inflation mark.

However, other issues would arise from this development as many analysts see inflation shooting beyond 12 per cent in a few months time, wondering if the apex bank would continue to raise the MPR as a response.

But more important implication is the lending rates across board. Obviously cost of borrowing and overall costs in the economy would be pressured upwards by this policy review.

Hence, the policy reversal appears contradictory as it is headed to setting off a cycle of inflationary pressure, which would require further policy adjustments, a containment measures, which would also signal policy instability.

On a positive note the MPR increase would spur investments in the financial markets as yields on the various treasury instruments would rise.

However, this may channel the available funds into financial investments to the detriment of real sector. Obviously, this would also be running contrary to the earlier position of CBN to influencing money supply into real sector. A similar circumstance would be playing out with the increase in CRR, less money in the narrow measure of money supply (M1).

Irrespective of what happens in the broad measure of money supply (M2), the new CRR would ultimately squeeze bank’s ability to lend to the economy and pressure GDP further down.

However, the focus of the apex bank appears primarily to contain the huge pressure on foreign reserves which has been plummeted by huge demand out-stripping supply in the official window of the foreign exchange market in the past 10 months.

As one of its primary mandates was to maintain exchange rate stability, with the increased CRR, CBN hopes to considerably weaken bank’s ability to pile up Naira resources for foreign exchange in its weekly auction, and hence starve off speculative demands and pressure on exchange rate in the parallel market which has created one of the world’s widest parallel market premium since last month. But financial market analysts have considerable doubt if this would work out as planned on a sustained basis beyond two to four weeks. It is believed that the preponderance of foreign exchange chase by banks and the speculators was being fueled by policy weaknesses which have created a great incentive for arbitraging and huge quick profit in the foreign exchange market.

Analysts also see the relative shallowness of the financial market, with few investible instruments and bearish stock market as circumstances that have forced banks and other dealers into foreign exchange trading.

Surprisingly, yesterday’s MPC was silent on foreign exchange policy, except for a hint by the CBN governor, Mr. Godwin Emefiele, that the apex bank was helpless in the face of dwindling reserves, expressing the hope that an oil price rebound in the international market may save the day.

This did not go down well with financial market observers who indicated that it triggered off fresh panic buying and speculative positioning in the foreign exchange market.  Hence, expected outcome of the policy reversal by yesterday’s MPC may be ineffective, sub-optimal or at best short-lived salutary effect.


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