CRR increment to 27.5% balances the odds to rising inflation, says experts

…as MPC urges FG to fix ‘structural impediments’ to growth

Adesola Afolabi

The decision taken by members of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) to raise Cash Reserve Requirement (CRR) by 500 basis point is simply to consolidate on the gains recent policy (the Loan to Deposit Ratio) have made on the economy.

Experts from Deloitte, Chapel Hill Denham and Codros Capital who spoke in a live interview at Channels said the hawkish stance taken by committee members is to balance the odds to rising inflation in the country.

Data from the nation’s statistics office put inflation rate at 11.98 percent as at December 2019. It was the fourth consecutive month of increase. Reading a communique from the policy members, Godwin Emefiele, the CBN governor said, members raised concern on an inflation rate of 12 percent being inimical to the country’s economy.

Reading from the communique, he said “increasing the CRR at this time is fortuitous as it will help address monetary induced inflation whilst retaining the benefit from the bank’s loan to deposit ratio policy which has been successful in significantly increasing credit to private sector as well as pursuing market interest rates downwards.”

He added that “the committee further encouraged the management of the bank to be more vigorous in its drive to improve access to credit through its pursuit of the LDR policy as doing this will help not only in creating job opportunities but will also help in boosting output growth and moderating prices.”

According to Tajudeen Ibrahim, head of research at Chapel Hill Denham, the decision will mean that a re-pricing in yields will happen sometime later this year.

He agrees that the decision to increase CRR is another way of reducing the level of money in the economy. He however noted that it will cause rates for assets to be priced higher, adding that the height in which pricing will go cannot be ascertained now but from Monday higher re-pricing of interest rates in the financial market is imminent.

Deloitte’s mergers and acquisition partner, Funke Oladoke said she understands the reasons given by the committee members for the decision to increase CRR. According to her, looking at the parameters will mean that caution is exercised so as not to distort the economy so much. “This is good, but down the line there will be an evaluation on what must change, the decision, is however not surprising she says.

Gbolahan Aina, investment management head at Cordros Capital, expressed similar optimism, adding that to keep inflation rate from spiralling a form of tightening without necessarily increasing MPR is required.

Having noted some constraints limiting further monetary policy measures to curtail inflation, Emefiele expressed committee members’ advice on upgrade of fiscal policies.

They advised the fiscal authorities that legacy structural impediments such as infrastructural deficit and long standing clashes between herdsmen and farmers be speedily addressed. These impediments, he said, are currently constraining domestic production and contributing to upward trending price development.