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Nigeria Monetary Policy January 2020

Nigeria: Central Bank keeps policy rate stable in January but hikes cash reserve ratio to curb liquidity

At its first meeting of the year on 23–24 January, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to hold its monetary policy rate unchanged, as had been broadly expected by analysts. However, it increased the cash reserve requirement for the first time in nearly four years in a bid to curb excess liquidity in the banking system. The rest of monetary policy parameters were left unchanged. Thus, the policy rate remained at 13.50% and the asymmetric corridor at plus 200 and minus 500 basis points around the monetary policy rate. The committee also left the liquidity ratio at 30.00% while the cash reserve ratio was raised from 22.50% to 27.50%.

Inflation accelerated for the fourth consecutive month in December to reach a 20-month high of 12.0% (November: 11.9%), amid rising money supply and the closing of land borders since August which has stoked food inflation. Despite the pick-up in inflation, the MPC deemed that keeping the policy rate stable “is essential for sustainable support to growth before any possible adjustments”. Instead, the CNB opted to tighten liquidity conditions, and thus restrain inflationary pressures, by increasing the amount of cash that banks are required to keep at the CNB. Previous measures that encouraged lenders to extend more credit to stimulate growth have led to an excess of liquidity in the system, which could stoke price increases further down the line.

Looking ahead, the Bank struck a neutral tone in its communiqué. It noted that maintaining the policy rate on hold provides space to fully evaluate the impact of additional measures it has implemented, such as raising banks’ loan-to-deposit ratios, thus indicating it would take a wait-and-see approach before adjusting its policy stance going forward.

The Central Bank’s next meeting is scheduled for 23 March.

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