Culled—Proshare
January 29, 2020
By FDC Ltd
The monetary policy committee (MPC) surprisingly increased the CRR by 500bps to 27.5% after 46 months of maintaining it at 22.5%, while holding Monetary Policy Rate (MPR) and all other parameters constant. The committee, which consists of 11 members, voted 9:2 in favor of an increase in CRR. The committee explained that this move was made to curtail inflationary pressures in the economy and increase the general level of interest rates.
The major considerations are:
- Persistent increase in inflation rate
- Improvement in financial soundness indicators of the banking system
- Rising burden of debt service
- Anticipated medium term liquidity surfeit from maturing OMO bills
The monetary policy committee was faced with a three-pronged policy dilemma. Tighten to tame the rising trend in inflation, loosen to sustain stability in the foreign exchange market or maintain rates to ensure the efficient impact of the heterodox monetary and fiscal policy measures deployed by the bank.
Implications
The hike in the CRR could mean an additional N1.4trillion of banking sector debits. The real impact is not only the liquidity reduction but the fact that it is sterilized at 0% return. This amount, which is approx. 5.17% of money supply will hopefully help in curbing price inflation, which is now becoming a policymaker’s nightmare. The effect of this on the money market was an immediate hike in interbank interest rates by over 400bps. However, the maturing OMO bills held by PFAs in January/February is in excess of N10trn, while the increased CRR is approx. N2trn. Thus, there will still be excess naira in the markets.
Lending to the private sector by banks grew from N15.5trn in May 2019 to N17.5trn by December 2019, showing sustainable support to growth. Hence, maintaining the MPR in the face of the minimum LDR requirement is sustainable to support economic growth and job creation in the private sector.