Elections: Again, CBN reduces money supply

    
The Central Bank of Nigeria on Tuesday moved to tighten liquidity ahead of the forthcoming elections as it raised the Cash Reserves Requirements for private sector deposits by 300 basis points from 12 per cent to 15 per cent.

The CRR is the amount of funds that the banks have to keep with the CBN and it determines the volume of cash in circulation within a given period of time.

For instance, if the central bank decides to increase the CRR, the available amount with the banks reduces while lending rates also increases.

The decision to increase the CRR for private sector funds was taken at the end of the Monetary Policy Committee meeting held at the apex bank’s headquarters in Abuja.

The increase in private sector CRR, according to analysts would enable the apex bank to withdraw over N300bn from circulation through the Deposit Money Banks.

Announcing the decision while briefing journalists shortly after the MPC meeting, the Acting Governor of the CBN, Dr Sarah Alade said the decision was taken in order to consolidate the success of monetary policy in attaining price and exchange rate stability.

She also said the potential headwinds in 2014; the ultimate goal of transiting to a truly low – inflation environment; and the need to retain portfolio flows were also major factors that were considered before the decision was taken.

The CBN Acting Governor said while the Committee unanimously voted for further tightening of monetary policy, members were divided on the instruments to be used in achieving that objective.

She explained that the Committee saw a raise in the private sector CRR as the best option that will achieve the monetary tightening needed presently without necessarily forcing an increase in lending rates through MPR hike.

She noted that while some members voted for an increase in the Monetary Policy Rate to retain and attract more inflows, others felt that such increase could have negative implications on access to credit and domestic growth.

For instance, Alade said seven out of the nine members that attended the meeting voted to increase CRR on private sector deposits by 300 basis points to 15 per cent, while two members voted to retain the CRR on private sector deposits at 12 per cent.

She said, “The Committee unanimously agreed that a continuation of a tight monetary policy was needed to consolidate recent gains.

“Recent resurgence of core inflation in spite of the downward trend in headline inflation reinforces this position.

“Thus, prudent monetary stance would also facilitate better reserve and exchange rate management in an environment where Fed tapering increases pressure on emerging economies financial markets.

“The MPC welcomed the growth expectations but expressed concern that the industrial sector has continued to lag behind.

“The Committee noted that growth remained consistently in favour of the agricultural sector, noting that the continued achievement of relative exchange rate stability and single digit inflation in 2014 given the risks in the horizon will require extra-ordinary measures.”

On the MPR and the CRR on public sector deposits, the Acting Governor said the committee decided to maintain the current rate at 12 per cent and 75 per cent respectively.

Asked if the apex bank was considering the devaluation of the Naira in the face of exchange rate pressure, she said the bank had no plans to do that.

Alade stated that the CBN remains committed to exchange rate stability and will continue to defend the Naira as long as the inflows remained.

“The issue of devaluation is not on the table for now. And that is why we voted for increased CRR. We still believe that interest rate can still be used at the moment rather than going the devaluation way,” She added.

She put the gross external reserves as at March 2014 at $37.83bn compared with $42.85bn at end of December 2013.

The CBN Acting Governor attributed the decrease in the reserves to increased funding of the foreign exchange market in the face of intense pressure on the Naira and the need to maintain stability.