CBN pegs CRR at 31%, retains MPR at 13%

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has reviewed the Cash Reserve Ration (CRR) deposits in the country to 31 per cent.

Addressing journalists at the end of the bi-monthly MPC meeting in Abuja on Tuesday, the CBN Governor Mr. Godwin Emefiele while justifying the decision to review the CRR said the committee “considered that the current discriminatory CRR on public and private sector deposits (20 per cent for private sector and 75 per cent for public sector) has not only constrained the policy space but could inspire moral hazard by private market participants.”

The cash reserve ratio is a central bank regulation sets the minimum fraction of customer deposits and notes what each commercial bank must hold as reserves (rather than lend out). These cash reserves are normally in the form of deposits made with a central bank, or cash stored physically in the bank vault (vault cash).

Currently Nigeria and four other countries have CRR over 20 per cent making it one of the highest in the world.

The cash reserve ratio is sometimes used as a tool in monetary policy to influence the country’s borrowing and interest rates by changing the amount of funds available for banks to make loans with. An institution that holds reserves in excess of the required amount is said to hold excess reserves.

On what informed the review of the CRR, Emefiele noted that members of the MPC had come to the realisation that “Additional tightening measures may not be appropriate now to avoid overheating the economy, a harmonisation of the CRR was imperative in order to curb abuses and improve the efficacy of monetary policy.”

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to increase the Cash Reserve Ratio (CRR) on private sector deposits by 300 basis points to 15 per cent from 12 per cent in March 2014 and since then the CRR has been tinkered with several times first with the private sector deposit and later that of the public sector.

The Committee Emefiele said “decided by a unanimous vote to retain the current tight stance of monetary policy. One member voted to increase CRR on private sector deposits from 20 to 25 per cent and retain CRR on public sector deposits at 75 per cent while another member voted to retain the CRR on private sector deposits at 20 per cent and increase CRR on public sector deposits from 75 to 100 per cent. Nine members, voted to harmonise the public and private sector CRR at 31 per cent.”

Two members he said voted to remunerate a portion of the CRR. All members voted to retain all other decisions taken at the last meeting of the MPC while improving the implementation of the CRR regime. Consequently, the MPC voted to:

(i) retain the Monetary Policy Rate (MPR) at 13 per cent with a corridor of +/- 200 basis points around the midpoint; (ii) retain the Liquidity Ratio at 30 per cent; and (iii) harmonize the CRR on public and private sector deposits at 31.0 per cent.

Members of Monetary Policy Committee (MPC) also “expressed concern about the weakening economic momentum but recognized the relative similarity in the condition to the evolving economic environment in virtually all oil exporting economies, suggesting the need for acceleration of various ongoing initiatives to diversify the economic base of the country.”

With the successful completion of the 2015 general elections and the progress recorded so far in the fight against insurgency, the Committee was optimistic that the slow pace of economic momentum would reverse in the near term.

On the activities of the foreign exchange market so far, the CBN governor noted that the stability and modest appreciation in the two segments of the market was largely due to the closure of the rDAS market and the modified two-way quote trading at the inter-bank segments of the market. “Gross official reserves rose from US$29.34 billion at end-March 2015 to US$30.05 billion on May 15, 2015.”

The Committee further said the need for proactive measures to protect the reserve buffer to safeguard the value of the domestic currency and engender overall stability of the banking system was inevitable.

-Ali Smart

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