CBN Cash Reserve Will Mop Up Liquidity In Banks – Expert

The decision of the Central Bank of Nigeria (CBN) to raise bank Cash Reserve Ratio (CRR) to 27.5% from 22.5% is to prevent bank liquidity, according to Ike Chioke, Group Managing Director of AfrInvest West Africa.

He said that the new CRR will mop up excess liquidity in banks as they would be squeezed from both ends in view of the Loan to Deposit Ratio (LDR) of 65% while other indices including the Monetary Policy Rate (MPR) at 13.5% remains unchanged.

Speaking on both the LDR of 65%, which is to encourage banks to give out loans, and the new CRR, Chioke said banks are being “squeezed” by the apex bank, adding that the move would control inflation, while banks are expected to grow in 2020.

“I think the banks are being squeezed from both sides.

“Increasing the LDR from 60%, we saw an N 800 billion potential capacity for banks to lend when they didn’t do that by September CBN further increased it to 65% which is estimated to about N1.5trillion lending capacity.”

“CBN is now worried that all the liquidity will end up to create more inflation, they had to pull back the CRR.”

The expert argued that the decision was an avenue for CBN to combat inflation as he said the hike will prevent more liquidity from hitting the market.

He said further that the market is supposed to see four trillion of Open Market Operation (OMO) maturity but with the increase in the CRR to 500 bps, the CBN will neutralize about N850 billion to hold on inflation.

He however expressed surprise at the ‘hawkish’ CRR, but added that the action was not unexpected considering the parameter of inflation which is driven by border closure.