A Professor of Finance and Capital Market has said that Central Bank of Nigeria (CBN) would reduce the Cash Reserve Ratio (CRR) by five per cent during its Monetary Policy Committee (MPC) meeting on Thursday.
Prof. Uche Uwaleke of Nasarawa State University made the prediction in an interview on Sunday in Lagos.
Uwaleke, who spoke on the expectations from the meeting slated for May 28, said the MPC would likely reduce the CRR from 27.5 per cent to its previous level of 22.5 per cent.
“The MPC will most likely adopt a slightly dovish approach which may entail reducing the CRR from 27.5 per cent to its previous level of 22.5 per cent, while retaining the other policy rates.
“That is, the MPR at 13.5 per cent, Liquidity Ratio at 30 per cent and the asymmetric corridor at +2-5.
“A reduction in the CRR will be the right decision to take as it will free up some funds for banks given that they are not remunerated for cash reserve with the CBN,” Uwaleke stated.
He noted that the reduction would be a breather and would support the banks not to lay off staff due to the coronavirus pandemic.
Uwaleke added that the CRR reduction would enable banks to maintain the Loan to Deposit Ratio put in place to enhance credit to the private sector, especially in this period of COVID-19.
“I think the choice before the MPC on May 28 will be either to maintain the policy parameters or relax them.
“The issue of further tightening of the policy may not arise as that could spark an outcry in view of the difficult times the economy is passing through.
“Essentially, the MPC will take into consideration the rising inflation rate which is moving far away from the CBN threshold of 9% and fast closing in on the MPR of 13.5%.
“If not put in check and it surpasses the benchmark rate, then we have a situation in which real returns are negative and becomes a disincentive to investors, especially portfolio investors.
“So, the MPC will be mindful not to discourage Foreign Portfolio Investment because of its positive impact on external reserves.
“The MPC will be the knock-on of a lower MPR on exchange rate against the backdrop of the move to merge the official and autonomous foreign exchange rates in line with the condition for accessing the $3.4 billion IMF’s Rapid Financing Instrument Facility.
“These factors will feature prominently in the considerations to retain the policy rates including the huge fiscal deficit in the 2020 budget that will be financed largely through borrowing by the government.
“On the other hand, the MPC will equally be concerned about the current economic recession occasioned by COVID-19 and the collapse in crude oil price.
“The need for complementary measures in support of government’s stimulus packages and the ones by the CBN.
“I also expect the MPC to consider the effect of a high MPR on the asset quality of banks especially its potential to increase non-performing loans arising from the inability of many bank customers hard-hit by the pandemic to meet their loan terms and conditions.
“Against this backdrop, I see the balance of risks weighing in favour of economic growth stimulation,” Uwaleke said.
He said the CBN governor might seize the opportunity of the MPC meeting to unveil some heterodox measures aimed at containing the negative impact of the pandemic on the economy.