MPC: Increase in CRR Inevitable, Say Access Bank, Afrinvest, Others

As members of the Central Bank Monetary Policy Committee (MPC) converge on Abuja, for a two-day crucial meeting tomorrow and Tuesday, expectations are high that emphasis will be placed on the strategies that deliver short, medium and long term solutions to the deteriorating macroeconomic outlook of the country.

Analysts believed the meeting would arguably be the most challenging for the Committee this year. This is because of the consensus among economic watchers that the dawn of the much expected oil price shock and the consequent exchange rate and assets prices volatility in the last one month demand major monetary action to moderate if not stemmed.

A leading financial advisory firm, Afrinvest West Africa, said in a report at the weekend that such a short term measure would include the sustained defence of the naira in order to calm nerves easing the volatility in the foreign exchange and capital markets.

Although Afrinvest voted for the retention of the Monetary Policy Rate at 12 per cent, and Cash reserves ration on public sector fund at 75 per cent, it said the current realities have necessitated a slight increase in the cash reserves ration for private sector fund.

“We expect the retention of the current 12.0 per cent and 75.0 per cent MPR and CRR on public sector deposits, however a mild increase in the CRR on private sector deposits may be considered,” the report said, adding that “On the foreign exchange side, the MPC may opt for a subtle extension of the mid-point at the official FX window to ease the pressure of fiscal buffers. In all, our primary concern is a likely knee jerk reaction to adjustments in the mid-point, while other alternatives suggested are in sync with the Afrinvest Research view of restoring confidence.”

Taking a similar position with Afrinvest, a report by the Economic Intelligence Group of Access Bank Plc, also made available to THISDAY at the weekend said domestic monetary policy will remain tight for the time being. Towards this end, we are of the opinion that the Central Bank may likely enact the following measures to counter currency weakness at its November MPC meeting.

Consequently, the Access Bank group expected the MPC to retain MPR at 12 percent, leaving the +/-200basis points corridor. It based its permutations on the fact that Nigeria remains reliant on portfolio inflows to stabilise the currency and these require attractive nominal and real yields.

The CBN, the report stated may also raise the Cash Reserve Requirement (CRR) on private sector funds to 18 per cent from 15 per cent, while retaining CRR on public sector funds at 75 per cent.

It said, “We anticipate the MPC will increase the CRR on private sector deposit in a bid to curb the level of banking sector liquidity and possible electionrelated fiscal risks. Furthermore, we expect issues around foreign currency deposits to be extensively discussed at the meeting.

Other highlights of the meeting, according to Access Bank, include the possibility of holding the Net Trading Position Limit at one percent. This, the bank said, will further help shore up the value of the naira. It, however, expected the committee to leave Liquidity ratio unchanged at 30 per cent.

Writing under the title, Monetary Policy Decision – With the exchange rate pressure, a HOLD is not an option, Meristem Securities Limited said it expects the option of an increase in the benchmark interest rate with a combination of an asymmetric corridor to be high on the plate.

The company explained that “this could improve the attraction of Nigerian assets to foreign investors due to the consequent higher risk adjusted real return on Nigerian assets. Hence, a 50100 basis points increase in the MPR is not unlikely alongside a possible removal of the lower corridor of the MPR while the upper corridor is retained.”