Godwin Emefiele, CBN Governor
Financial experts on Saturday said that the upward review of the Cash Reserve Ratio (CRR) by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) was necessary to tame inflation.
They spoke with the News Agency of Nigeria (NAN) in Lagos, while reacting to the outcome of the first MPC meeting of the year.
The MPC, at the end of the two-day meeting, voted to raise the CRR to 27.5 per cent from 22.5 per cent.
The CRR is used to determine the minimum deposit commercial banks must hold in reserves with the CBN rather than lend out. It influences funds available at the bank’s disposal to create loans.
With a vote of nine out of 11 members, the committee agreed that the monetary policy rate, which impacts interest rate, should remain at 13.5 per cent, liquidity ratio at 30 per cent and asymmetric corridor at +200 -500 basis point.
Commenting on the issue, Prof. Sheriffdeen Tella, Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, said that the increment would reduce liquidity in the system.
“The priority of the CBN is to reduce inflation rate below 10 per cent, therefore, the appropriate policy is to reduce liquidity.
“The increase in reserve ratio will achieve that objective by reducing money with the banks, affecting their ability to give out credits and it is apparent that other ratios be retained.
“The capital market is likely to be a beneficiary as investors would shift funds to invest in the market, more so when interest rate is unchanged and inflation rate remains high,” Tella stated.
According to him, high interest rates will also make borrowers to seek for fund from the capital market where cost of funds is lower.
Mr Sola Oni, the Chief Executive Officer, Sofunix Investment and Communications, said that the increment was a right step in the right direction.
“CRR is a monetary policy instrument deployed by the CBN to manage money supply, inflation and liquidity in the system.
“It is the percentage of a bank’s total deposit in cash with the apex bank.
“It serves as a buffer in the event of any need to manage excess liquidity or increase it in a way to enhance bank’s ability to grant credit or charge appropriate interest rate.
“The CBN has inched up the CRR to 27.5 per cent from 22.5 per cent as a strategic move to tackle inflation.
“It is obvious that Nigeria is already peeping into inflationary pressure as the apex bank admitted that once the inflation hits 12 per cent, it becomes a source of concern to the economy,” Oni said.
According to him, inflation decreases purchasing power and has dire consequences on the stock market.
“It affects dividend-paying stocks while prices of income for paying stocks shrinks.
“It places stock market on a wild ride, making it to plunge today and soar tomorrow.
“The threat of inflation is real. It can make the economy as a whole boom or bust,” Oni said.
Mr Ambrose Omordion, the Chief Operating Officer, InvestData Ltd., said rising inflation concern made the committee to vote for adjustment in CRR.
Omordion said that the decision was in order to curtail consumer price index that stood at 11.98 per cent in December.
He noted that the apex bank’s unconventional monetary policy targeted at economic stimulation was yielding the expected result apart from spike in inflation figure.
“Higher CRR will reduce money in the system and trigger assets re-pricing that may lead to slight upward adjustment in interest rate because of competition in the money market,” Omordion said.
He said that the adjustment would not have much effect on the stock market and economy since the MPR remain unchanged.
Omordion, however, urged the Federal Government to wake up in the areas of infrastructure development and security, to boost productivity.
Mr Moses Igbrude, President, Issuers and Investors Alternative Dispute Resolution, said that the raise would help to mop up money in circulation to enhance and sustain the value of naira.
Igbrude noted that a weaker naira would have negative impact on the general economy.
He appealed to the apex bank to pay little interest on banks CRR instead of holding it without interest.
According to him, retaining MPR at 13.5 per cent is good, but the rate is still high.
Igbrude called on the CBN to do everything possible to maintain single digit interest rates to stimulate the economy.
