By Babajide Komolafe
Following its decision to raise the Cash Reserve Ratio (CRR) to 27.5 percent from 22.5 percent, the Central Bank of Nigeria (CBN) has reduced the lending ability of banks by N1.2 trillion
The CRR represents the portion of total assets banks are required to keep as cash deposit with the CBN. Reduction in the CRR increases the amount of money available for banks to lend while an increase in the CRR reduces the amount of money available for banks to lend.
The increase in CRR means that banks will keep additional N1.2 trillion as cash with the apex bank, thus reducing the amount of money available for them to lend to members of the banking public.Citing the need to curtail the four months upward trend in the inflation, vis-a-vis huge liquidity inflow, estimated at N4 trillion in first quarter of the year (Q1’19), expected from matured Open Market Operation, OMO, treasury bills, the Monetary Policy Committee (MPC) of the apex bank at the end of its , meeting on Friday jerked up the CRR by 500 basis points (bpts) to 27.5 percent, from 22.5 percent, while retaining the Monetary Policy Rate (MPR) and other parameters at the same level.
Explaining the rationale for this decision, the CBN Governor, Mr. Godwin Emefiele, said: “The MPC expressed concern about the rising inflation, which increased consecutively in the last four months as at December 2019 to 11.98 per cent and higher than its target range of 6-9%.
“This rising price level is attributable to a combination of structural and supply side factors, expansionary fiscal policy; and growth in money supply arising from rising liquidity surfeit in the industry due to changes in the Bank’s OMO policy.
“In furtherance of its primary mandate to maintain price and monetary stability and in view of the anticipated medium-term liquidity surfeit from maturing OMO bills held by local private and institutional investors, which would not be rolled over, the Committee considered it prudent to raise the CRR to curtail liquidity surfeit in the banking system.
“The Committee is confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the Bank’s Loan-to-Deposit Ratio, LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards.”
Expressing confidence that the CRR hike will not slow down lending to the economy, the MPC said: “Although tightening would limit the ability of Deposit Money Banks, DMBs, to create money, ultimately leading to a reduction in money supply and curtail their credit creation capabilities, which would eventually lead to rising cost of credit and credit risk as DMBs re-price their risk assets, the MPC believes that the aggressive pursuit of the current loan-to-deposit ratio policy thrust would continue to help to catalyze credit growth and positively impact growth and prices.”
Commenting, analysts at United Capital Limited projected that the CRR hike will impact banking system liquidity negatively noting that the “additional five percent CRR is equivalent to N1.2 trillion quarantined by the CBN”.
This huge outflow from the banking industry, they argued will lead to sharp increase in interest rates on Overnight lending and Collateralised lending in the interbank money market in the short term.
While they were of the opinion that banks will likely increase interest rate on fixed deposits, in order to attract more deposits to moderate the impact of the CRR hike, they however said that the MPC decision will undermine the revenue and profitability of banks.
On their part, analysts at Cowry Assets Management Limited commended the CRR hike saying: “We welcome the decision of the MPC to increase the CRR by 500bps as this creates an outlet to ease built up pressure of increased financial system liquidity which was created by its restrictive OMO policies. In doing so, and by not reviewing the MPC upwards, we feel the monetary authority remains in alignment with the fiscal authority’s goal to boost output growth, in part, by making credit available at affordable cost to real sector players.”
Also commending the MPC decision, analysts at Vetiva Capital Management Limited said: “We consider the decision to hold the MPR steady and raise the CRR as appropriate given the current growth-inflation dynamics. Maintaining the status quo on the MPR will afford the Central Bank more time to assess the impact of recent directives by the Bank to stimulate growth while also containing the surge in liquidity. Going forward, interest rate movements will be economic data driven, as highlighted in the Bank’s five-year policy thrust.”