What CBN’s new CRR means for banks, economy

• Policy to withdraw about N1.5 trillion in circulation
• Calls for interest rate cut lose appeal, basis

The hike in the banking sector’s mandatory Cash Reserve Ratio (CRR) signals not only withdrawal of money in circulation, but a measure to curb the four-month resurging inflation and tacit declaration that rate cut is not in consideration, at least in the short-term.

The policy makers of the Central Bank of Nigeria (CBN) had last weekend, tweaked the monetary policy instrument for the first time in about four years by 500 basis points, to 27.5 per cent.

CRR is a mandatory part of bank’s total deposit, expressed in percentage, which a bank must maintain with the apex bank at all times and subject to change at the discretion of the regulator.

By the decision, banks are now left with less funds to the tune of the new CRR, as the amount available for disbursement in the form of loans.

The development has further created doubts over the possibility of an interest rate in the near future, which real sector operators have long canvassed.

But the CBN Governor, Godwin Emefiele, admitted the move was part of efforts to curb excess liquidity on the banking system, already adjudged as a contributor to the resurging inflation trend.

Inflation, as at December 2019, settled at 11.98 per cent, but has kept the trend for four months consecutively. But the country’s border policy, which led to the shutting of the land borders in fight against smugglers, strengthened the inflationary pressure, through supply shortages.

Since June 2019, the apex bank has been pursuing a aggressive policy of credit expansion, with focus on small businesses by setting a minimum Loan-to-Deposit Ratios for banks from 60 per cent to 65 per cent presently.

Emefiele, while unveiling the apex bank’s position for 2020 earlier at the Bankers Dinner, organized by the Chartered Institute of Bankers of Nigeria, in Lagos, disclosed that CBN would maintain a cautious approach and defend the naira, to avoid reversal of gains.
While the majority of the monetary policy committee members favoured keeping benchmark interest rates on hold at 13.5 per cent, it would be worth mentioning that tweaking it in any direction holds disproportionate repercussions.

“Maintaining the monetary policy rate at its present level is essential for sustainable support to growth before any possible adjustment,” he said, while presenting the communiqué.

Reiterating the bank’s stance on maintaining tight monetary stance in 2020, analysts said it was obvious that the banking sector regulator would leave rates unchanged.

In a report by Reuters, the Chief Economist for Africa and the Middle East at Standard Chartered, Razia Khan, said: “Today’s announcement is, however, still a tightening of liquidity, and near-term, we would expect market interest rates to adjust to this.
But like a justification for CBN’s monetary policy decision, as precaution for the things ahead, FXTM Senior Research Analyst, Lukman Otunuga, noted that there are headwinds against the country presently and others underway, which calls for cautious approaches.

According to him, appetite for riskier assets, including stocks and deals in emerging markets, are likely to diminish as investors rush towards prime destinations of safety as though they are pursuing Gold.

He said that the Nigerian Naira, like many other emerging market currencies, could weaken on renewed global growth concerns, with falling oil prices complicating the matter.

“The economic calendar for Nigeria is relatively light this week, as most of the action may be on Friday when foreign exchange reserves and manufacturing PMI data are published.

“While a positive set of economic releases could boost sentiment towards the Nigerian economy, much of the focus will remain on the outcome of last week’s Central Bank of Nigeria (CBN) policy meeting, the pending Federal Reserve meeting and coronavirus fears,” he said.

Speaking on the monetary policy decision, he said that it was as widely expected that the apex bank will leave interest rates unchanged at 13.5% in January.

“However, the CBN looked beyond the usual monetary policy tools by tweaking the CRR to 27.5% from 22.5%. The increase in CRR reduces the amount of money available for banks to lend, essentially pressuring liquidity with a goal of reducing inflation levels.

“With the CBN on a quest to tame inflation, speculation around a rate cut anytime has been thrown out of the window,” he said.

Outside of Nigeria, the Federal Reserve policy meeting on Wednesday (today) will be in focus. The U.S. Fed is widely expected to leave interest rates unchanged, thanks to a robust labour market, moderating inflation and positive economic data.

“However, if the Fed expresses optimism over the U.S. economy, the dollar could appreciate, consequently, pressuring the Naira. In the commodity markets, oil prices tumbled over three per cent on Monday and shed more than 10 per cent since the start of 2020.

“Rising fears over the Coronavirus impacting demand for oil could drag the commodity deeper in the abyss. Falling oil price is significant for Nigeria, especially when considering that roughly 90 per cent of export earnings and over 70 per cent of government revenues are from oil exports.

“What is even more concerning is Nigeria’s 2020 budget, which has set the benchmark for oil at $57. With Brent crude currently trading at $59 and WTI Oil around $52.50, the oil revenue goal of N2.64 trillion is under threat,” he added.

For analysts at Codros Securities, in a period where growth concerns seem to be on the front burner, it is expected that the outcome of MPC meeting, especially the latest one, would have been expansionary, despite the renewed inflationary pressure.

However, they described MPC’s decision as “a hawkish surprise on the market,” as nine out of the 11 members of the committee elected to adjust the CRR upwards by 500bps to 27.5 per cent – a move last witnessed in March 2016.

Querying the justification, the analysts noted that after the policy makers stated clearly that the primary driver of recent inflationary pressures is a structural one that requires fiscal measures, rather than monetary intervention, it is difficult to see how a CRR hike will reduce the “price of rice” in the market.

“Beyond the obvious, the 500bps hike in the CRR will sterilize between N1trillion and N1.5 trillion in liquidity from the system, further raising questions about the seriousness of the apex bank’s policy actions towards driving credit extension to the private sector.

“With about N7.16 trillion worth of OMO bills maturing in first half of 2020, of which about 26 per cent will no longer participate in the OMO market due to restrictions on local non-bank investors, we suspect the committee hopes to curtail any speculative pressures that may result from these maturities.

“However, aside from the value of a timely response to impending currency market pressures, which should potentially dampen any premature expectations for a sudden devaluation, we see little benefits to the CRR hike.

“Instead, its credit growth mandate will now take a backseat until the end of the elevated maturity cycle, after which the MPC will be forced to make a U-turn towards the previous dovish stance in our opinion,” they noted.