The Central Bank of Nigeria (CBN) yesterday rose from its 94th Monetary Policy Committee (MPC) meeting to increase the cash reserve requirement (CRR) on private sector deposits in commercial banks by 300 basis points to 15 per cent while retaining the benchmark Monetary Policy Rate (MPR) at 12 per cent with a corridor of +/-2 per cent.
MPC, according to the acting governor of the central bank, Dr. Sarah Alade, considered among other things the success of the monetary policy in attaining price and exchange rate stability; the potential headwinds in 2014; the ultimate goal of transiting to a truly low inflation environment; and the need to retain portfolio flows, in taking the decision.
She said the committee unanimously voted for further tightening of CRR but was divided on the instrument.
"While some voted for an increase in the MPR to retain and attract more inflows, other members felt that such increase could impact access to credit and domestic growth negatively," she explained.
Consequently, the committee voted that cash reserve requirement on private sector deposits held by deposit money banks (DMBs) be moved from 12 per cent to 15 per cent to contain liquidity in the system.
However the much anticipated possible adjustment in the exchange rate band and increase in public sector CRR to 100 percent were left unchanged.
Alade noted that the committee unanimously agreed to continue the tight monetary policy stance in order to consolidate recent gains.
Alade said the committee's decision was based on the recent resurgence of core inflation in spite of the downward trend in headline inflation.
"Thus, a prudent monetary stance would also facilitate better reserve and exchange rate management in an environment where the Fed (Reserve) tapering increases pressure on emerging economies financial markets," she said.
The acting CBN governor, who read the committee's communiqué, said though it welcomed growth expectations, she expressed concern that the industrial sector had continued to lag behind. Notwithstanding, she said growth remained consistently in favour of the agricultural sector, while the continued achievements of relative exchange rate stability and single digit inflation in 2014, given the risks in the horizon would require extraordinary measures.
She said: "The committee viewed some of the developments as positive optimism by the market relative to other emerging market economies.
"While tension in Ukraine over Russia's claims to Crimea remained serious, direct trade and financial links between Nigeria and the duo remained largely limited. Thus, the risk premium could come from rising oil and gas prices which were deemed positive shocks," she said.
She acknowledged that the sudden surge in domiciliary account balances, which may offset the gains from imposing 75 per cent CRR on public sector funds, had also become a source of concern.
However Alade said devaluation of the naira was not on the table, insisting that tinkering with the interest rate could still be used rather than devaluation.
Commenting on the outcome of the MPC meeting, the Chief Execitive of Financial Derivatives Company, Mr. Bismark Rewane, said the hike in private sector deposits to 15 per cent would translate to the mopping up of over N400 billion from the banking system.
He however said the hike would not have much impact on liquidity since the amount represents only three per cent of money supply.
"The amount to be mopped up represents only about three per cent of total assets in the system and would not cause any major shock," he said.
Analysts had anticipated one possible scenario alongside the hike in the CRR. The first scenario was a shift in the exchange rate mid-point from N155 to N165/$, which is an estimated 3-5 per cent depreciation in the naira.
The rationale for this was the increased volatility recorded at the interbank and parallel markets, and the CBN's continued support of the naira at a cost to external reserves.
On his part, the Chief Executive, Cowry Asset Management Limited, Mr. Johnson Chukwu who supported the MPC decision, argued that "is the only way they (MPC) can reduce the liquidity in the banking system". He noted that with CRR on public sector deposits already at 75 per cent, there was need to moderate private sector CRR.
Chukwu however pointed out that "lending rates in the economy would go up". To the Regional Head of Research, Africa, Standard Chartered Bank, Razia Khan, the decision by the committee would provide some near-term stabilisation to the market.
"It is a tightening of policy and signals the withdrawal of additional liquidity after all. It falls short of dealing with the much bigger issues currently facing Nigeria," she added.
Furthermore, Khan, noted that given quantitative easing tapering in the US, concerns about bigger policy changes ahead, a shortfall in oil earnings, a secular narrowing of the current account surplus and the election cycle, "each successive round of tightening is likely to be even less effective in attracting new inflows into Nigeria".
In the meantime, in a strange coincidence that has sent tongues wagging, fire yesterday gutted the CBN Lagos branch.
Although a majority of the members of staff had gone home, those who were within the environs scampered to safety from the 10-storey complex after the fire alarm reportedly went off.
As at press time, the extent of damage to the building was not clear but no life was lost, rather the only casualty recorded was that of a fireman who fainted and collapsed due to suffocation caused by smoke inhalation.
Eyewitness accounts said but for the quick action of the firemen, the fire would have spread rapidly and razed not just the CBN building, but all others in the densely-populated environment.
Confirming the incident, the South-west Public Relations Officer, National Emergency Management Agency (NEMA), Mr. Ibrahim Farinloye, said the fire started from the first floor. He said: "For reasons yet unknown, the fire outbreak started from the first floor of the building and was trying to blaze its way downstairs before personnel from the Federal and Lagos State Fire Services came to the rescue.
"After battling the flames, they were able to contain the fire and brought the situation under control. We are yet to assess the extent of the damage as at now.
"Although it was a blazing fire, it was contained within the confines of the first floor by clamping down the offices, which entailed breaking the windows and doors to check any smaller fire.
"We recorded no casualty and no one was trapped or wounded because it started at about 6 pm. This was because the staff had gone home by then, so we were able to coordinate operations effortlessly."
Also, in a statement yesterday, the CBN said the fire started at 5.30 pm at its Lagos branch. The statement signed by Isaac Okorafor, on behalf of the Director Corporate Communications, said the fire began on the first floor of the building but was put out by a combined team of firefighters from the CBN and other institutions.
It assured its numerous stakeholders that the records of the central bank remained intact, as it has an effective backup of its records, as part of its disaster recovery infrastructure.