Another Novel Policy from the CBN
The Central Bank of Nigeria (CBN) today announced a novel policy in the Nigerian economy. The Governor, Lamido Sanusi, who is obviously aware of the yearnings of many Nigerians for a reduction in interest rates took a different direction that is expected to systematically raise interest rates in the economy. Known for his attraction to shock and surprises, Sanusi certainly lived up to expectations today.
The Central Bank kept monetary policy rate (MPR) at 12% with the corridor of plus/minus 200 basis points intact but he has raised the cash reserve ratio (CRR) on public sector funds to 50%. As with any other funds in the bank, the public sector funds attracted a CRR of 25% from the banks but this new policy essentially means that the funds that many Nigerian banks used to float on in the past have suddenly become expensive funds overnight.
This new policy hinges on the fact that the foreign reserves, which had touched a five year high of about $48.5 billion, has dropped to $46.9 billion and still sliding as the CBN continues to defend the Naira. The CBN Governor who said that he has no intention of returning for a second term wants to leave a legacy: stable exchange rate and inflation rate firmly in the single digits. While Sanusi may have achieved his aims, the Nigerian economy has paid dearly for it as the banks have refused to lend and have preferred to lend only to the Government by way of high yielding treasury securities.
The effect of this rise in the CRR for public sector funds are likely to resound in the Nigerian markets for the coming weeks as stock markets and fixed income markets react negatively to this news. The fixed income market is expected to take the first hit as the banks sell down fixed income securities to meet up with the 50% requirement; this will be followed by a rise in interest rates as many banks also go on an aggressive deposit drive in a market that is already tight with liquidity. The rising rates and continued drop in inflation rates will increase the real rate of return on fixed income investments, which will also lead to a reduced appetite for risky asset classes such as equities and then the stock market will take the second hit of the bearish wave in the coming weeks.
At this time, it has become imperative that investors thread with caution as the markets are expected to be choppy and extremely volatile in the coming weeks.