Central Bank keeps 12 per cent lending rate, raises cash reserve ratio

The Central Bank of Nigeria (CBN) on Tuesday resolved to keep lending rate in the banking sector, commonly referred as the Monetary Policy Rate (MPR) at 12 per cent, while raising the cash reserve ratio (CRR) from 8 to 12 per cent with immediate effect.

The apex bank at the end of its Monetary Policy Committee (MPC) meeting said its decisions were informed by worrisome developments at both the domestic and global economic environments and the need to

mitigate their likely negative impact on the nation’s economy.

While retaining the symmetric corridor of +/-200 basis points, CBN governor, Lamido Sanusi said the increment of the CRR takes effect from Wednesday, July 25, 2012, even the net foreign exchange open

position (NOP) was reduced to one per cent from three fixed during its meeting last May.

Mr Sanusi told reporters at the end of the meeting in Abuja that the Committee had to take the very hard decisions after a critical assessment of recent developments in the increasingly turbulent global

economic environment and the need to ensure economic stability in the country.

Specifically, the governor explained that in the face of declining commodities prices at the international oil market as well as declining foreign reserves, increased demand for foreign exchange, fiscal dominance and capital flow reversals, monetary policy must bear a larger burden of economic adjustment.

He said the Committee was confronted with the option of protecting reserves by reducing the supply of dollars at the WDAS, or addressing monetary and liquidity conditions more aggressively by tightening

liquidity levels and raising domestic interest rates, amongst others.

The apex bank’s governor pointed out that having considered the pros and cons of each and combinations of options, including the challenges of stemming the inflationary pressures, sustaining a stable exchange

rate for the Naira, creating a buffer for external reserves, and mitigating the impact of the continued slowdown in global economic activities, the Committee resolved in favour of the retention of the

MPR and jacking up the CRR, amongst others measures.

“In the Committee’s view, these challenges would persist in the medium to long term with the attendant consequences on oil receipts,” Mr Sanusi said. “The Committee noted the fears about Europe’s debt

crisis, which flared recently as concerns intensified that Spain would be next in line for a government bailout. It noted that the potential cost of a Spanish bailout far exceeds what is available in existing

emergency funds.

“Already, the European decline has taken its toll on oil demand and exports. The rising global uncertainty and weaker external demand are causing headwinds for export-dependent economies. The unfavourable

outlook is further strengthened by the fragile domestic conditions.

The MPC is of the view that growth could further decline during the rest of the year.”

He said the Committee voted to keep the MPR as a strategic need to chose a policy direction that would have the least negative impact on

the wider economy, to the extent that the longer-term benefits to the

economy far outweigh the short term costs.

“The committee could not lower the MPR in view of the sustained

slowdown in domestic economic output growth,” he said, pointing out

that global growth prospects could further weaken the exchange rate

and adversely affect the nation’s foreign reserves.

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