Monetary Policy Review - A Means to an End


Monday, January 27, 2020 / 04:15 PM / By ARM Research / Header Image Credit: NEXT IAS


A means to an end

In our strategy outlook for the year published some days back, we outlined how CBN policies over H2 19 centered on managing FX stability as well as reducing its cost of liquidity management. In addition, we highlighted why we believe managing FX stability would continue to be the focal point of its policies over the year (See report: CBN caressing both FPIs and Economic Growth).


At its first MPC meeting of the year, nine out of 11 MPC members voted to hike the Cash Reserve Ratio (CRR) by 500bps to 27.5% while leaving all other policy parameters unchanged. Central to the discussion was the increase in inflation1, which the MPC links to structural factors and excess system liquidity due to CBN's policy on excluding non-banks local from OMO auctions. It's decision thus reflected the need to control the impact of money supply on consumer prices. In addition, the committee agreed to continue its drive on improving access to credit via its loan to funding requirement. Particularly, total credit to the private sector increased by N2 trillion between May and December 2019.


On the contrary, we think the basis for the CRR hike was beyond inflationary pressure given that the upward trend seen in inflation has been largely driven by supply bottlenecks from the border closure. As a matter of fact, the MPC alluded to this at its last meeting in November. We believe the intent to its decision its reflective of the apex bank's desire to reduce the cost of managing system liquidity. To buttress, feedback from sources revealed that over the past 7 weeks, CBN had unusually debited banks placing excess bids at both FX auctions and OMO auctions.


We estimate that the CBN spent an annual average of N2.1 trillion within 2018 and 2019 in managing liquidity via its regular OMO auctions. We therefore think the high cost of managing liquidity largely informed the monetary authority's decision. As a matter of fact, we find it hard to reconcile the apex bank desire for banks to grow credit assets while jacking up CRR.


Lower costs but liquidity surfeit to remain

As at October 2019, we estimate effective CRR for the banks printed circa 29%, which is higher than the 22.5% requirement. With the recent increase to 27.5%, we believe the apex bank would still charge DMBs additional debits regardless of the position of present effective CRR. Based on an assumption the CBN apply the incremental CRR charge of 500bps on existing deposits (N16.5 trillion2), we estimate a total debit of N831 billion.


Analyzing the impact on market rates, we expect to see a knee-jerk reaction in interbank rates over the coming days which will eventually normalize back following significant inflow of maturities particularly in February (OMO: N2.3 trillion, FGN Bond: N586 billion3, NTB: N259 billion). Elsewhere, we see limited impact on FI yields given the quantum of expected liquidity. Hence, we see limited scope for higher yields over the first half of the year.


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Related News from ARM's H1 2020 Nigeria Strategy Report  

  1. NSR H1 2020 (11) - Fixed Income - Liquidity Surfeit to Keep Yields Subdued
  2. NSR H1 2020 (10) - Monetary Policy - CBN Caressing Both FPIs and Economic Growth
  3. NSR H1 2020 (9) - GDP - Economic Growth Should Remain Anemic, Flatlined at 2.2%
  4. NSR H1 2020 (8) - Inflation Set for a Double Whammy in 2020!
  5. NSR H1 2020 (7) - Currency - How Long Can The CBN Keep Up?
  6. NSR H1 2020 (6) - Balance of Payment - Edge of the Cliff
  7. NSR H1 2020 (5) - EM Portfolio Flows - Happy Days Ahead for EM Foreign Portfolio Flows
  8. NSR H1 2020 (4) - Commodity Prices - Contrasting Fortunes for Global Soft Commodity Market
  9. NSR H1 2020 (3) - Global - After a Slowdown in 2019, 2020 Growth Receives a Timely Boost
  10. NSR H1 2020 (2) - Crude Oil - Tug of War; the Bears Win
  11. NSR H1 2020 (1) - MEA Region: Modest Growth With Positive Outlook

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Related News - Monetary Policy

  1. CRR Increase May Not Be An Appropriate Tool to Fight Inflation
  2. Banking Sector Update - Banks May Wobble on MPC's CRR Move
  3. CBN MPC Calls On FG To Improve Security, Address Infrastructure Deficit
  4. CBN Communique No. 128 of the MPC Meeting - Jan 23-24, 2020
  5. Understanding Emefiele's Silver Bullet - Sonnie Ayere
  6. CBN MPC Retains MPR and Liquidity Ratio; Raises CRR to 27.5% In First Meeting of 2020
  7. MPC Preview: Dovish Stance but Hawkish Actions
  8. Ignoring LIBOR Cessation May Raise US Leveraged Loan Credit Risk
  9. The MPC Members In One Accord; Verdict Of The Committee Was Unanimous
  10. Personal Statements By The MPC Members At The 127 MPC Meeting Of Nov 25-26, 2019
  11. CBN's Regulatory Measures To Improve Lending To The Real Sector: Impact And Challenges
  12. GDP Growth: How Far Can Monetary Policy Go?
  13. Rates Continue to Decline as Banks Struggle to Meet CBN's 65% Minimum LDR


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11.    Banks' H1 2019 Numbers: Top Line Growth, Bottom Line Uncertainty

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13.   12 Banks To Pay N499b CBN Fine For Loan Policy Breach

14.   Nigerian Banks Tried, But 'Not All' Made New Loans Threshold

15.   CBN Reviews LDR Target Upwards To 65%; DMBs Required To Attain LDR of 65% By Dec 31, 2019

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