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Fear of Inflation forces CBN to raise banks’ CRR to 27.5%

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Says Inflation Beyond 12% Is Injurious To Nigerian Economy
• Raises Alarm On Govt’s Level Of Indebtedness

The fear of a further spike in inflation regime which as at December last year berthed at 11.98 per cent yesterday forced the Central Bank of Nigeria (CBN) to undertake a moderate tightening stance, leading to the raising of Banks’ cash reserve ratio (CRR) by 500 basis point, from 22.5 per cent to a new level of 27.5 per cent, in a move to mop up what the apex bank described as liquidity surfeit in the Nigerian economy, responsible for driving the inflation since August of 2019.
 
It, however, retained the Monetary Policy Rate (MPR)- the lending rate at 13.5 per cent (rate at which it lends to commercial banks) and every other parameter around the rate, except the CRR which it altered.

 
The action was part of the measures undertaken by the apex bank at the end of its 271 Monetary Policy Committee (MPC) meeting, the first in the year 2020 to keep the rising price level in checks in Nigeria
 
The Cash Reserve Ratio (CRR) is the percentage of banks’ mandatory savings with the apex bank in relation to their total funds.
 
By increasing the CRR percentage from 22.5 per cent to 27 per cent, the CBN is limiting the volume of cash banks can have access to and ultimately lower the amount of liquidity in circulation.
 
Addressing newsmen at the end of the MPC meeting, the CBN Governor and Chairman of the Committee, Mr. Godwin Emefiele said the MPC was drawn between the options of loosening or tightening because of the prevailing economic situation.
 
He went ahead to explain how the option of tightening weighed against loosening: “On the argument for a hold, the MPC acknowledged that a mix of heterodox monetary and financial policy measures have recently been deployed by the Bank. Noting the existence of a lag between the policy pronouncement and its impact on the economy, hold in the rate would ensure its efficient impact on the economy. 

“The Committee noted the slow pace and low rate of economic growth as real GDP growth of 2.10, 2.12 and 2.38 per cent in Q1, Q2 and Q3 2019, respectively, being below the population growth rate, still needs sustained policy support.
 
“Maintaining the monetary policy rate 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 for evaluating the impact of the heterodox monetary and financial policies to support lending by the banking industry without altering the policy rate. 

“On the downsides to holding, the Committee noted that it would reduce the speed of economic recovery relative to loosening, exert a drag on output growth, as DMBs continue to utilise bonds sales instead of engaging in financial intermediation to the private sector.
 
“In view of the foregoing, the Committee by a decision of nine members voted to alter the Cash Reserve Requirement (CRR) by 500 basis points from 22.5 to 27.5 per cent, while leaving all other policy parameters constant. Two members voted to leave all parameters constant. In summary, the MPC voted to: Change the CRR from 22.5 to 27.5 per cent; retain the MPR at 13.5 per cent; retain the asymmetric corridor of +200/-500 basis points around the MPR; retain the Liquidity Ratio at 30 per cent,” the CBN governor further revealed.
 
According to him, MPC expressed concern on the government’s rising level of indebtedness and advised the federal government to use other parameters, such as revenue generation to gauge the consideration of borrowing rather than relying on GDP alone.
 
It then called on the federal government to pay serious attention to fixing infrastructure deficit and security, particularly as it affects food production arising from herders/farmers’ conflicts across the country, pointing out that this was the major driver of inflation in the country.
 
“On fiscal operations, the Committee applauded the Government for the recent signing of the 2020 Finance Bill which opens a new vista of opportunities in public financial management. The MPC, however, cautioned that public debt was rising faster than both domestic and external revenue, noting the need to tread cautiously in interpreting the debt to GDP ratio.

“The Committee also noted the rising burden of debt services and urged the Fiscal Authorities to strongly consider building buffers by not sharing all the proceeds from the Federation Account at the monthly FAAC meetings to avert a macroeconomic downturn, in the event of an oil price shock,” the MPC advised.

It urged the government to gradually reduce reliance on oil receipts and focus on revenue diversification through reforms of the tax system and rationalise fiscal expenditure towards reducing the current excessively high cost of governance.
 
The MPC expressed concern about the rising inflation, which increased consecutively in the last 4 months as of December 2019 to 11.98 per cent and higher than its target range of 6-9 per cent. This rising price level is attributable to a combination of structural and supply-side factors, expansionary fiscal policy; and growth in money supply arising from rising liquidity surfeit in the industry due to changes in the Bank’s OMO policy.

In furtherance of its primary mandate to maintain price and monetary stability and in view of the anticipated medium-term liquidity surfeit from maturing OMO bills held by local private and institutional investors, which would not be rolled over, the Committee considered it prudent to raise the CRR to curtail liquidity surfeit in the banking system. 
 
The next MPC meeting holds in March this year.


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