Nigerian MPC harmonizes CRR on Banks’ Deposits to 31.0%

Lagos, Nigeria (Capital Markets in Africa):- The Monetary Policy Committee (MPC) at its 244^th meeting decided to harmonize the Cash Reserves Requirement (CRR) on public and private sector deposits to 31.0%. The effect of macroeconomic issues in the global space were considered and analysed with the conclusion that no near term external shock is expected to affect the domestic economy. The growth potential of the domestic economy was reported weak but did not call for a major policy decision in the near term. The general price level was also a point of concern as the 8.7% CPI for April was a 20bps rise compared to the previous month; nonetheless, it was not deemed to pose a macroeconomic threat. All Monetary Policy Rates were left unchanged save for the Cash Reserve Requirement (CRR).

The Committee Members reached a consensus on monetary policy by harmonizing CRR on Public and Private Sector Deposits to 31.0%. The harmonized CRR is 4.0% less than the previously implied CRR of 35.0%. This slight easing may engender a positive impact on the financial market in sessions ahead. Commercial banks that are more exposed to public sector deposits will experience more liquidity while banks with more private sector deposits exposure will remain constrained. Other monetary policy rates (MPR: 13.0%, NOP: 0.5%, liquidity: 30.0%) were left unchanged in line with our expectation.

With few days to the end of the current administration, the CBN’s MPC maintained status quo on most policy rates save for the harmonization of the CRR on public and private sector deposits to 31.0%. The MPC may have exercised restraint to observe the fiscal policy direction of the incoming administration before taking any major policy decision. Based on our estimates, using the CBN’s February 2015 data, the implied CRR for public and private sector deposits stood at 35.0%. As at February, public and private sector deposits settled at N3.6trillion (27.3%) and N9.6 trillion (72.7%) respectively.

By implication, the CBN unleashed the strings on deposits in the banking system; hence, increasing available deposits by approximately N528 billion. In our view, the expectation that the new CRR may lead to increased real sector lending may not actually be the case in the interim, given the evident risks that pervade the space. Based on management guidance, banks are not willing to increase lending expressively until the new administration settles and policy direction is ascertained.

On the other hand, the additional liquidity into the system may be channelled to the fixed income market given the current attractive yields. This in turn may help push down yields within the short term. We wish to highlight that the full implementation of the Treasury Single Account (TSA) may also reduce the quantum of public sector deposits in the banking system.

Source: Afrinvest (West Africa) Limited Research Team.