Inflation: CBN Gives Banks 48 Hours To Meet 32.5% CRR

In a more aggressive twist to rein in inflation, the Monetary Policy Committee of the Central Bank of Nigeria (CBN) yesterday announced a two-pronged approach to effectively mop liquidity out of the vaults of the nation’s deposit money banks.

This is as analysts say the latest hike in rates by the MPC will only have a mild effect on inflation as the rising interest rate will further dampen growth of the economy.

MPC increased the Monetary Policy Rate (MPR) by 150 basis points and the Cash Reserve Ratio (CRR) by a minimum of 32.5 percent. What that means is that the MPC raised the MPR to 15.5 percent, increased the CRR to a minimum of 32.5 percent, retained the asymmetric corridor of +100/-700 basis points around the MPR, and retained the Liquidity Ratio at 30.0 percent.

CBN Governor Godwin Emefiele said the commercial banks are now required to fund their accounts with the apex bank between today and tomorrow to enable the CBN meet the new liquid asset requirement or face severe sanctions that include disqualification from foreign exchange market.

“We have increased the CRR, and we expect that this decision at this meeting must be seen to be potent. It must achieve the effect that the MPC thinks it should achieve. What it means is that we expect that all the banks in Nigeria must fund their accounts by Thursday (48 hours) because we will debit them for CRR. We will take their CRR to a minimum of 32.5 percent. Which means we are going to take liquidity out of their vaults by Thursday.

“If any bank fails to meet up with this expectation, the decision of the MPC is that we may need to preclude those banks from foreign exchange market on Friday and onward until they meet this 32.5 percent,” Emefiele said yesterday during a press briefing on the outcome of the September edition of MPC meeting in Abuja.

The message is meant to underscore the fact that MPC feels the very aggressive decision to rein in inflation must yield results. The CBN is making that effort to avoid public dissent for not being able to rein in inflation in spite of all the rates it has raised.

About all the MPC members agreed that a tight policy stance would help consolidate the impact of the last two policy rate hikes, which is already reflecting in the slowing growth rate of money supply in the economy. The option to loosen the policy rate was not considered, according to the communique that was read. The reason is that it would be gravely detrimental to reining-in inflation.

Emefiele said policy tightening was the best option at the current situation of inflationary pressure, even though he acknowledged the fact that it will retard growth and increase cost of borrowing. Within a four-month period, Nigeria’s inflation had accelerated aggressively by 280 basis points from 17.71 per cent in May 2022 to 20.52 per cent in August 2022.

“Yes, it will retard growth. But it is important, you know, that the level of rate is what will help you to slow down the rate of inflation. Raise rate or not, what will happen is that consumption and investment will be affected because the purchasing power of the consumer will derail or completely dissipate. You don’t have a choice but to raise rates,” the CBN governor said.