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%.
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.
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.