On Friday, the Monetary Policy Committee of the CBN held its first meeting in 2020 where it kept the benchmark interest rate at 13.5% and Liquidity rate at 30.0% but increased the Cash Reserve Ratio (CRR) to 27.5% from 22.5%. In our view, we believe this is part of CBN’s efforts to curtail the rising level of inflation (11.98% in December 2019) on the back of uptick in system liquidity, continuous border closure and potential impact of implementation of minimum wage increase. 

We believe the current inflation rate which is well above CBN’s long term  target rate of 6-9% may increase further on the back of the Apex bank’s mandate for banks to growth their loan book. Similarly, we believe the continuous OMO restriction, which has limited investment options for investors (particularly PFAs), may continue to keep rates at low levels in 2020.

With additional N3.24trillion worth of OMO bills maturing from now till the end of Q1 2020, we believe the increase in CRR may not have significant effects on yields in the fixed income space. We believe this does not suggest a change in monetary policy direction (dovish) but rather a temporary adjustment to curb the rising level of inflation.

From our estimate, we expect about N800bilion to be mopped up from banks from the additional cash reserve. Overall, we think this may be negative for banks’ earnings as this amount will be deducted at zero cost to CBN. This, in addition to the LDR target of 65% set for Banks and recent downward review on bank charges, may continue to weigh in on bank’s performance in the near term.