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Why CBN raised cash reserve ratio of commercial banks

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The Central Bank of Nigeria (CBN) on Friday looked beyond the usual option of adjusting the Monetary Policy Rate (MPR) it had adopted for months to manage liquidity and inflation rate by raising the Cash Reserve Ratio (CRR) to mitigate the impact of the high cost of doing business in the country. Before last Friday’s decision, the CRR, which is the quantum of funds that banks have to maintain in CBN vaults at all times, had remained unchanged for years while the apex bank concentrated largely on the MPR and other monetary instruments such as the Open Market Operations (OMO) to monitor, evaluate and decide on appropriate measures to maintain price and financial system stability on a sustainable basis.
Justifying the latest decisions of the Monetary Policy Committee (MPC) at the end of its meeting in Abuja, the CBN Governor, Godwin Emefiele, said that the members opted for the upward review of the CRR to 27.5 percent up from the 22.5 percent after a critical appraisal of the micro and macroeconomic developments in the domestic economy and the need to grow the economy. As expected, the latest decision of the MPC has continued to elicit reactions from finance and economic development experts who, though were consensual in their views about the appropriateness of the apex bank’s policy measures, but believed that the monetary measures required fiscal and other productivity-boosting policy complementarities to achieve the single digit inflation rate and position the economy on the path of sustainable growth.

This is not unexpected when developments in the macroeconomic landscape over the past few years and recent fiscal policy measures to improve the efficiency of yearly budgets and stimulate growth, including the huge infrastructure gap, dwindling real income of consumers, lingering real sector under-performance over the years and the 7.5 percent VAT rate scheduled for administration from February 1, 2020; amongst others are properly analysed. DAILY TRUST

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