The Governor of Nigeria’s Central Bank raised the cash reserve ratio for banks for the first time in four years to curb excess liquidity on the banking system, which it said is contributing to inflation.
During the CBN’s first monetary policy committee meeting of 2020 the bank raised reserves by 500 basis points, after majority of the members voted to increase the ratio to 27.5 per cent. It kept benchmark interest rates on hold at 13.5 per cent.
Emefiele said that “maintaining the monetary policy rate at its present level is essential for sustainable support to growth before any possible adjustment”.
Emefiele has said the bank would maintain its tight monetary stance in 2020.
Razia Khan, Chief Economist for Africa and the Middle East at Standard Chartered said that “today’s announcement is, however, still a tightening of liquidity, and near-term, we would expect market interest rates to adjust to this”.
Nigeria survived its first recession in 25 years in 2017, but growth remains slow and volatile. The Apex Bank has tried to stimulate the economy by encouraging banks to lend, which encourage has swelled liquidity.
Inflation stood at 11.98 per cent in December, rising for the fourth straight month, worsened by Nigeria’s border closure in August to fight smuggling. The central bank said inflation was outside its band of 6 per cent to 9 per cent and that it wanted to curtail inflationary pressure.
Emefiele said the bank would continue to sustain the value of the naira, though its dollar reserve of $38b was shrinking, no adjustment was planned.
The Central Bank had banned domestic funds from buying its treasury bills, keeping markets awash with naira. The strategy was responsible for the lowering bond yields and investor apathy.
Lower yields recorded last year made foreign investors cut their participation in Nigerian government bond auctions. They rather moved into bills supported by the Central Bank.
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