By Nkiruka Nnorom

The decision by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to cut the cash reserve ratio (CRR) of the deposit money banks to 25 per cent and retain the benchmark rate at 13 per cent will result in recovery in the NSE Banking index, Ezcellon Capital, an investment banking firm, said in a report.

The firm said in the report titled, “MPC Brief: Changing Policy Scope: From Restrictive to Accommodative Policy Drive” that the decision is an indication that the era of restrictive monetary policy may be over and the CBN may have commenced the path of accommodative monetary policies to support growth and employment in the economy.

It said: “Commercial banks are no doubt the biggest winners of the committee’s decision as it should unlock liquidity for the banking industry which could be channelled towards credit creation.

“From our estimates, total banking industry deposits was circa N17.6 trillion as at the end of August 2015. This implies that the 6.0 per cent reduction in CRR would likely reduce the amount being sterilised by the CBN from N5.5 trillion to N4.5 trillion, thus injecting additional N1.0 trillion into the banking industry.

“Also, the equities market, especially the Banking sub-index, should respond positively in the immediate, and erase some of its year-to-date losses. Year-to-date, the NSE All Share index and Banking sector index have both shed 11.8 per cent and 8.8 per cent of their 2015 opening value respectively.”

“However, with an average loan to deposit ratio of 70.0 per cent for tier one banks as at half year 2015, which implies limited room for credit creation, a significant portion (N642.0 billion given that tier one banks control about 60.8 per cent of total industry deposits as at June 2015) of the additional released funds may be injected/invested in government securities for the remainder of the year.

“This could undermine the growth and employment generation objectives the MPC seeks to achieve via the CRR reduction. Nonetheless, yields on government bonds and treasury bills may trend southwards in the short to medium term if banks channel the additional funds to the fixed income market,” it further stated.

Continuing, the report said, “Whilst the policy pronouncement by the MPC may have seemed positive, the potential downside of this move may be on the stability of prices in the economy, especially the Naira.

“We believe unlocking additional liquidity in a period where the CBN seeks to maintain exchange rate stability and curtail inflationary pressures may be counter-intuitive, as this could likely add to the pressure on the domestic currency and by extension, increase the general price level in the country. This would typically worsen real income of the average consumer and by extension, consumption and growth in the economy.”