The CBN has concluded its monetary policy meeting and announced MPR will remain at 12% for the 17th straight month. Whilst this was expected the unexpected news however was the committee’s decision to increase the cash reserve requirements for public sector funds from 25% to 50%. Banks rely a lot on public sector funds for free floats which they mostly channel into short term assets such as TB’s and overdrafts.
The CBN’s objective apparently is to stymie the negative effect of Government funds on the wider economy as the country gears up for election campaigning. It is also part of the CBN two pronged approach to defend the Naira and reduce inflationary pressures. The effect of this however is that Banks will have to look for alternative sources deposits which you’d expect will come from the private sector. This typically results in an increase in aggressive marketing, hike in fixed deposit rates and proliferation of banking retail products. All of this is likely to culminate in a hike in lending rates as banks pay higher rates to attract deposits.
It’s pretty much obvious what the CBN Governors and his crew have been all about for the last few years. For now the guy on the street looking to borrow money from the bank and start a new business of finance a project is least of their worry. They also careless about what the consumer feel especially those who have no augmentable income other than their salaries. Having given up on forcing a tight fiscal policy (largely due to his propensity to rabble rouse) upon the various arms of Government his only option is to limit the effect of Government money by squeezing liquidity in the system which is ostensibly under his watch.
The stock market is bound to feel the heat pretty soon as most will liquidate their investment and simply stash their cash in high yielding deposit rates. Margin lending is probably still born as very few will take the risk. And as Government revenues drop due to slower oil sales, most state government will have no choice that to borrow to fund their projects. This is a double edged sword as the back door introduction of higher lending rate will increase deposit interest rates and discourage public sector borrowing. However, because the private sector will desist from borrowing the Government will remain the lender and borrower to the economy. The net effect off course is nearly negligible.
Lets just hope the effect of Cash-less banking and all the pool for mobile money help cushion the effect of all of this. For now, I guess we’ve been there and done that.
