By Mustapha Suberu
The Monetary Policy Committee – the Committee – of the CBN concluded its fifth meeting for the year yesterday against a backdrop of slowing economic growth, rising inflation and other external economic headwinds such as continued lower prices of crude oil in the international market. The Committee unanimously voted to retain the nation’s benchmark policy rate at 13%, but however, by a vote of 7 to 3, decided to reduce the CRR (Cash Reserve Ratio) for commercial banks to 25% from 31%.
The decision of the Committee was based on the following considerations:
- Slowing and fragile macroeconomic environment
- Potential liquidity strain in the banking industry resulting from elongation of loans to the Oil and Gas players and state governments; and recently, the commencement of the Treasury Single Account (TSA)
- Rising but slowing rate of growth in inflation especially on a month-on-month basis
- Persistent decline in global crude oil prices
The action by the MPC signals that the era of restrictive monetary policy may be over and the apex bank may have commenced the path of accommodative monetary policies to support growth and employment in the economy.
Source: NBS, Eczellon Research
Commercial banks are no doubt the biggest winners of the Committee’s decision as it should unlock liquidity for the banking industry which could be channeled towards credit creation. From our estimates, total banking industry deposits was circa N17.6 trillion as at the end of August 2015. This implies that the 6.0% reduction in CRR would likely reduce the amount being sterilized by the CBN from N5.5 trillion to c.N4.5 trillion, thus injecting additional N1.0 trillion into the banking industry.
However, with an average loan to deposit ratio of c.70.0% for tier one banks as at half year 2015 – which implies limited room for credit creation – a significant portion (c. N642.0bn given that tier one banks control about 60.8% of total industry deposits as at June 2015) of the additional released funds may be injected/invested in government securities for the remainder of the year. This could undermine the growth and employment generation objectives the MPC seeks to achieve via the CRR reduction.
Nonetheless, yields on government bonds and treasury bills may trend southwards in the short to medium term if banks channel the additional funds to the fixed income market. Also, the equities market, especially the Banking sub-index, should respond positively in the immediate, and erase some of its year to date losses. Year to date, the NSE All Share index and Banking sector index have both shed 11.8% and 8.8% of their 2015 opening value respectively.
Source: NSE, Eczellon Research
Source: FMDQ-OTC, Eczellon Research
Whilst the policy pronouncement by the MPC may have seemed positive, the potential downside of this move may be on the stability of prices in the economy, especially the Naira. We believe unlocking additional liquidity in a period when the CBN seeks to maintain exchange rate stability and curtail inflationary pressures may be counter-intuitive, as this could likely add to the pressure on the domestic currency and by extension, increase the general price level in the country. This would typically worsen real income of the average consumer and by extension, consumption and growth in the economy.
Source: NBS, Eczellon Research