The Central Bank of Nigeria (CBN) may rein in banks’ liquidity through raising credit reserve ratio (CRR) for private sector or public sector deposits to combat inflation.
However, CBN Governor, Godwin Emefiele, may stick to his promise on assumption of office on June 2 of a gradual reduction in interest rate against the wishes of members of the Monetary Policy Committee (MPC) who insist that prevailing economic indices call for an upward review.
A source in the CBN told TheNiche that the measure would have taken effect at the September meeting of the MPC but for some reasons.
If the prevailing economic indices continue, he said, the CBN will opt for a higher rate, particularly for private sector deposits, at the next MPC meeting at the end of this month.
At the last MPC meeting, six members supported retaining the current stance of monetary policy and five backed further tightening it.
The MPC held benchmark interest rate at 12 per cent, with a corridor of +/-200 basis points around the midpoint. It retained public sector CRR at 75 per cent; and the private sector at 15 per cent.
But the source argued that retaining the current monetary policy may go against the urgent need to control liquidity.
He added that large excess reserves average over N300 billion with the likelihood of further liquidity build up by additional N866 billion through the redemption of maturing Assets Management Corporation of Nigeria (AMCON) bonds in October constitute a huge threat.
“I think there should have been adequate consideration for defending structural liquidity in the banking system and managing inflationary pressure. Expectations around exchange rate and inflation vulnerabilities may waver,” the source warned.
At the meeting, Emefiele admitted that liquidity would need to be controlled to safeguard price stability, implying the need to tighten monetary policy to combat excess liquidity and inflation pressure.
He expressed concern over policy challenges, such as possibility of capital reversal, as United States’ quantitative easing finally ends this month, coupled with dwindling oil output, and declining oil prices, and upward trending headline inflation.
These, the source said, have implication for foreign reserves depletion as the CBN may draw from the reserves, if necessary, to defend depreciating naira.
However, the analyst was optimistic that the CBN will come up with a measure to contain excess liquidity in the banking system before a build up in election related spending aggravates the situation.
“Banks must explore ways of lending their excess reserves to credible real sector operators rather than placing these funds in fixed income and other investment instruments. That is the only way to go,” the analyst stated.
A fortnight ago, the CBN sold dollars directly to lenders to prop up the falling naira within a N163.50-N164.35 range in the interbank market.
The local currency relapsed again last week, closing at N164.22 to the dollar, on Friday compared with a N163.70 close the previous week.
Declining global oil prices and low offshore inflows into the local debt and equity markets have weakened the naira in the past three weeks, forcing the CBN to intervene.