An economist, Dr Baba Musa, in Lagos, described the Cash Reserve Ratio (CRR) increment by the CBN Monetary Policy Committee (MPC) as “a smart and forward looking move’’ for the economy.
Musa, who is the Director General of West African Institute for Financial and Economic Management (WAIFEM), reported.
MPC, at the end of its 271st meeting and first in fiscal 2020 on Friday, voted to raise the CRR by 500 basis points to 27.5 per cent, from 22.5 per cent, while leaving all other policy parameters constant.
The lending rate, also called Monetary Policy Rate (MPR), was held at 13.5 per cent, while the asymmetric corridor was retained at +200/-500 basis points around the MPR, and the Liquidity Ratio at 30 per cent.
Musa said, “I think the CRR increment is just a smart and forward looking move by the CBN to ensure that the excess money does not have its way into the foreign exchange market.
“Once the apex bank does not mop up the liquidity in the system at this point, usually, what will happen is the excess money in circulation will chase the dollar available; people will run to the foreign exchange market to buy and this will cause the naira to depreciate,’’ he said.
He commended the MPC for taking a right step in view of the circumstances that were prevailing in the economy.
According to him, the CBN is the overseer and has a grip of what has been happening in the economy since the injection of N700 billion into it in the recent past.
Musa said that once there was liquidity injection and there was no mopping up, it would lead to inflation.
He said it was the duty of the bank to anticipate any move that would cause changes in prices and reduce the money in circulation.
The DG said if the bank did not take this proactive move, the naira would depreciate in no distant time.
Prof. Ndubisi Nwokoma, Director, Centre for Economic Policy Analysis and Research (CEPAR), University of Lagos, also described the MPC move as a good one.
“Yes, the reason given for the increase in the CRR by the CBN monetary policy committee is to address inflation issue.
“It is good that the MPC has identified inflation as a key indicator that is getting out of hand.
“It is good in that money available to deposit money banks has been reduced by this change, but the downside risk is the reduction in loanable funds to the real sector.
“This has implications for economic growth and job creation in an economy with a rising unemployment rate,’’ he said.
Nwokoma also wished that the Monetary Policy Rate was also addressed.
He said, “Another issue that could have been addressed is the MPR itself which could have been slightly increased by about 50 basis points to 14 per cent, which could have had a stronger effect on inflation by increasing the cost of credit through making it available.’’