The Central Bank of Nigeria (CBN) has said its Monetary Policy Committee (MPC) decided to raise the cash reserve ratio (CRR) so banks would mop up excess liquidity in the banking system.
The regulatory body said this move would help banks channel more money to the employment-stimulating sectors of the economy.
Also, the bank said the committee’s decision to continue holding other monetary policy parameters was informed by the need to sustain the impact of the various monetary and financial policy measures adopted to further its primary mandate to maintain price and monetary stability.
At the end of its 271st meeting and the first in fiscal 2020, the MPC voted to raise the CRR by 500 basis points to 27.5 per cent, from 22.5 per cent, while leaving all other policy parameters constant.
The lending rate, also called monetary policy rate (MPR) was held at 13.5 per cent, while the asymmetric corridor was retained at +200/-500 basis points around the MPR, and the Liquidity Ratio at 30 per cent.
While presenting the post-MPC communique, the Central Bank Governor, Godwin Emefiele, said the decision to raise the CRR followed the anticipated medium-term excess liquidity as a result of maturing open market operation (OMO) bills by local private and institutional investors.
The CRR is the quantum of cash or total deposit of the customers, which commercial banks hold as reserves either in cash or as deposits with the central bank for lending to customers.
The governor said the committee was confident increasing the CRR at this time will make more money available to banks to lend to businesses and help address monetary-induced inflation, whilst retaining the benefits from the Bank’s loan-to-deposit ratio (LDR) policy.
He said the LDR policy has so far been successful in significantly increasing credit to the private sector, with gross credit in the banking industry growing by N2 trillion between May and December 2019.
Boosting access to credit through LDR policy
The committee urged the central bank to be more vigorous in its drive to improve access to credit through LDR policy to help create jobs but also help boost output growth and moderating prices.
Apart from agriculture and manufacturing, the committee said increased lending to the retail and small and medium enterprises segments of the economy would boost domestic output growth in the short to medium term.
“To retain the gains from credit expansion and current industry focus on lending, the Committee advised the Bank to sustain its LDR Policy and in addition continue to deploy its DCRR policy to direct new funding for greenfield projects and expansion to critical sectors of the economy,” he said.
The committee noted that money supply in circulation grew by 6.22 per cent in December 2019, while aggregate credit also rose to 27.33 per cent, from 23.12 per cent.
This was attributed to an increase in rising credit to government to 92.95 per cent in December 2019, from 72.36 per cent in the previous month, with credit to the private sector growing to 13.61 per cent, from 12.82 per cent in the corresponding period.
Sectoral distribution of the credits between end-May 2019 and end-December 2019 showed manufacturing (N446.44 billion); general retail and consumer loans (N419.02 billion) and General Commerce (N248.48 billion).
Credits to agriculture, forestry and fishing was N160.94 billion; information and communications (N156.47 billion); finance and insurance (N129.87 billion); construction (N86.54 billion); and transportation and storage (N68.61 billion), amongst others.
Committee arguments on policy decisions
On the decision to hold the other policy rates, the committee also weighed the options to either tighten or loosen the policy stance.
On tightening, the committee said given the rising inflationary trend above the upper band of the 6-9 per cent threshold, this may be necessary to tame the rising inflation, which stood at about 11.98 per cent in December 2019, from 11.85 per cent in the previous month.
Besides, with the relatively bearish equities market outlook, which points to waning investor confidence in equity in preference for coupon rate on bonds, the committee said raising the policy rate could help reverse the trend and attract more foreign portfolio investments.
Again, tightening the rates, the committee argued, would boost accretion to foreign reserves and attain relative stability in the foreign exchange market.
Moreover, the committee believed a tightening policy at this time would limit deposit money banks’ ability to create money, ultimately resulting in a reduction in money supply, curbing lending and rising cost of credit and credit risks.
On the decision to loosen, the committee said the relative stability in the foreign exchange market has boosted the confidence of foreign investors in the economy.
The committee said there was, therefore, no immediate concern that loosening would exert pressures on the foreign exchange market in the near term.
In addition, the committee was of the view an accommodative monetary policy would motivate banks to lend to maintain their profit performance, guarantee a decline in the overall cost of production and stimulate output growth.
On the other hand, loosening the policy stance, the committee said, could amplify inflationary pressures, as the economy continues to experience excess liquidity pressures, particularly if it will drive growth in consumer credit, without corresponding adjustment in output.
“An interest rate reduction would increase money supply and exert pressure on the exchange rate, while an accommodating monetary policy stance may not necessarily lower the retail lending rate, as interest rates are generally sticky downwards,” the committee said.
The committee said the decision to hold the policy rates was informed by the need to sustain the impact of the impact of the recent decision to adjust upwards the LDR to 65 per cent, from the previous 60 per cent.
The committee noted the slow pace and low rate of economic growth of the real gross domestic product (GDP) of 2.10, 2.12 and 2.38 per cent in first, second and third quarters of 2019, respectively.
With the GDP growth rate still below the population growth rate of 3 per cent, the committee said there was need to sustain policy support to sustain the growth momentum.
“Maintaining MPR at its present level is essential for sustainable support to growth before any possible adjustments. This will enable policy to react suitably to developments as they occur in the near term.
“In addition, retaining the current policy position provides avenues to evaluating the impact of the various monetary and financial policies to support lending by the banking industry without altering the policy rate,” the committee said.
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