CRR increase may not be an appropriate tool to fight inflation – Experts

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CardinalStone Research
Monetary Policy Committee swings hawkish wand 
In a hawkish move, the Monetary Policy Committee (MPC) resolved to increase the cash reserve ratio (CRR) by 500bps to 27.5% at the end of its two-day meeting on 24 January 2020. The policy tweak was a response to the liquidity glut, catalyzed by the OMO ban, and its purported impact on rising inflationary pressures. Specifically, given the MPC’s stance that inflation rate above 12.0% (11.98% in December) is inimical to growth, the committee may have been uncomfortable with recent CPI trajectory. While an increase in monetary policy rate (MPR) may have been the orthodox approach to taming inflationary pressures, the weak passthrough mechanism of the MPR likely influenced the decision to tamper with the CRR in its stead.
MPC’s tools are limited to constrain current inflation
In our view, the MPC’s recent decision was taken in cognizance of the fact that Nigeria’s current inflationary pressure is partly monetary and partly supply-side driven. We, however, note that while the increase in credit creation and liquidity may have played a part, the crux of the inflationary pressure likely stems from food inflation as evinced by the instantaneous surge in food inflation from the months following the land border closure in mid-August 2019 (August inflation: 11.02%YoY; December 2019- 11.98%). Given that the major drivers of inflationary pressures are structural/supply side, the CRR hike is unlikely to significantly mute domestic price pressures. Additionally, the MPC may have limited scope to combat the recent inflationary pressure as the MPR remains relatively tight at 13.5%. To our minds, therefore, improvements in the production of domestic substitutes of previously imported food/products and overall upgrade of infrastructure are likely to have a more direct impact on Nigerian inflation.