The committee also held other policy parameters constant:

  • Retain the MPR at 13.5%.
  • Retain the asymmetric corridor of +200/-500 basis points around the MPR
  • Retain the Liquidity Ratio at 30%.
Godwin Emefiele, CBN governor, speaking at the end of the 270th meeting of the Monetary Policy Committee (MPC) at the apex bank’s headquarters in Abuja. (Twitter/Channels Television)
Godwin Emefiele, CBN governor, speaking at the end of the 270th meeting of the Monetary Policy Committee (MPC) at the apex bank’s headquarters in Abuja. (Twitter/Channels Television)
Twitter/Channels Television

What is cash reserve ratio?

Cash reserve ratio is one of the instruments used by central banks to set a minimum amount to be held by a commercial bank.

It allows CBN to maintain a desired level of inflation, control the money supply, and also liquidity in the economy.

Why CBN MPC increased Cash Reserve Ratio?

According to the Committee, tightening may be necessary to tame the rising trend in inflation. As of December 2019, Nigeria's inflation rate climbed to 11.98%, fourth consecutive month as food prices continue to spike due to border closures.

The figure is 0.13% points higher than the rate recorded in November 2019 (11.85%), according to the Nigerian Bureau of Statistics (NBS).

The country is targeting a 6-9% threshold.

A towel with a print of the Nigerian naira is displayed for sale at a street market in the central business district in Nigeria's commercial capital Lagos February 4, 2016. REUTERS/Akintunde Akinleye/File Photo
A towel with a print of the Nigerian naira is displayed for sale at a street market in the central business district in Nigeria's commercial capital Lagos February 4, 2016. REUTERS/Akintunde Akinleye/File Photo
Reuters/Akintunde Akinleye

How will this affect citizens

Although the main aim of the rate-setting committee is to tame rising inflation in the country, this will affect the flow of money in the economy. It will also limit banks' ability to lend and thereby increase the interest rate.

If banks have less capital to lend, businesses and investments will be affected.

This also negates the CBN's recent policy on the Loan-to-Deposit ratio to increase lending to the real sector of the economy.