FREE

Monetary Policy Decision - MPC opts to tighten liquidity via CRR hike

MONETARY POLICY DECISION                                                        

MPC opts to tighten liquidity via CRR hike                                                 

By a vote of 9 to 2, the Central Bank’s Monetary Policy Committee, at its first meeting of the year, voted to HOLD the benchmark Monetary Policy Rate (MPR) and the Liquidity Ratio (LR) at 13.5% and 30% respectively. That said, the Committee members voted to raise the Cash Reserve Ratio (CRR) by 500bps to 27.5% amid fears of a looming liquidity glut.                                                    

The Committee noted that macroeconomic fundamentals appear to be improving- albeit rather slowly. Specifically, Q3’19 GDP (2.28% y/y) saw a slight improvement from the preceding two quarters while the continued expansion of the Purchasing Managers’ Indices through the last three months of 2019 suggests stronger growth in Q4’19. They highlighted that the pace of economic expansion still lags population growth but sounded optimistic about the ability of ongoing policies (i.e. the Differentiated Cash Reserve Ratio and the Loan-to-Deposit Ratio directives) being implemented by the Bank to stimulate growth in the real sectors of the economy.                                                       

We consider the decision to hold the MPR steady and raise the CRR as appropriate given the current growth-inflation dynamics. Maintaining the status quo on the MPR will afford the Central Bank more time to assess the impact of recent directives by the Bank to stimulate growth while also containing the surge in liquidity. Going forward, interest rate movements will be economic data driven, as highlighted in the Bank’s five-year policy thrust.