By BABAJIDE KOMOLAFE

The decision of the Central Bank of Nigeria (CBN) to increase cash reserve ratio (CRR) on private sector deposits has proved ineffective in curbing excess liquidity in the interbank market.

At its Monetary Policy Committee (MPC) meeting in March, the CBN increased CRR on private sector deposit to 15 percent from 12 percent. The decision was aimed at reducing money supply by reducing the amount of idle cash (excess liquidity) in the interbank market.

Managing Director/Chief Executive, Financial Derivative Company Limited, Mr. Bismarck Rewane however noted that the decision has not been ineffective.

“MPC expectation that the increase in private sector CRR from 12 to 15 percent will suck out the excess liquidity in the system was misplaced”, he said.

In his monthly economic news and views presented at the Lagos Business School (LBS) last week, Rewane noted that “Average interest rates in the money markets declined to 10.25 percent per annum in April as a result of liquidity saturation”.

His observation was corroborated by data on the amount of cash (liquidity) in the interbank money market. The data indicated that excess liquidity in the interbank market ranged from a low of N238.52 billion to a peak of N813 billion in April, with an average of about N400 billion.

The data also indicated low patronage for the Standing Lending Facility (SLF) of the CBN as banks depended less on loans from the apex bank to meet their liquidity needs. The Standing Deposit Facility of the CBN however enjoyed huge patronage during the month, as banks deposited idle cash with the apex bank.

Rewane however predicted that the next MPC meeting to be held this month will not likely result in a change of policy. He said there is 90 percent probability that the MPC will maintain, the Monetary Policy Rate (MPR) at 12 percent, banks’ liquidity ratio at 30 percent, CRR on public sector at 75 percent, CRR on private sector deposit at 15 percent, and Net Open Position (NOP) of banks at 1.0 percent.

He noted that the MPC would likely maintain these decisions due to relative stability and positive movements in economic indicators, slow but steady naira appreciation, benign inflationary pressures, gradual accretion of external reserves, and higher nominal gross domestic product (GDP).