Obidients are the most brilliant sets of people from Nigeria…. As if they are selected amongst the crops of the finest…
No wonder, they can’t be GASLIGHTED!!!
Below is a very lucid explanation of all the recent CBN’s monetary policy and abragadabra…..
Read the analysis by @Nefertiti…
“For those of us who do not understand what is going on here. I will try my best to explain the meaning of MPC, MPR, CRR & Liquidity Ratio. WALK WITH ME & retweet for others.
Monetary Policy Rate or MPR is a tool employed by Central Banks, & it is used to control money supply in the economy, lending rates & inflation as well.
If a central bank is a mechanic, then screw drivers & spanners are the MPR.
The 400 basis points simply mean 4%. Therefore, Yemi Cardoso’s Monetary Policy Committee (MPC) raised MPR by 4%. From 18.75% to 22.75%.
Raising the MPR could curb inflation & woo investors. Because investors like higher interest rates when they buy government issued treasury bills & government bonds.
Investors stay away from a country when inflationary rates are higher than interest rates. But I ncreasing interest rate from 18.75% to 22.75% could also lead to slower economic growth, lower consumer spending, & higher interests on loans. So it’s a double-edged sword.
The CBN is targeting inflation with this policy. But has it worked in the past? THE ANSWER IS NO! Emefiele tried it several times, & it kept on failing. It won’t work on food inflation by the way. The biggest driver of inflation in Nigeria is Food Inflation.
Using monetary policies to target food inflation is counterproductive, because farmers can’t go to their farms. You need to fix the supply side first, before the polices can work.
READ ALSO : CBN Sells Over $300m To Banks As Naira Gains
Food inflation can only be tackled when farmers return to their farms. This can only happen when you fight insecurity to a standstill.
Again, raising Cash Reserve Ratio (CRR) to 45% means that banks are now required to retain 45% of customer’s cash deposits with the CBN. So CRR is the CBN debits to commercial banks. It means that First bank or Access Bank must keep 45% of your cash deposits with the Central Bank of Nigeria.
This way, banks will no longer retain huge amount of cash in their vaults to lend to customers. Therefore higher CRR discourages borrowing & lending at the same time.
Liquidity ratio is banks balance sheet, or health status. It tells you if a bank is able to pay off its debts & liabilities. Or if a bank has kwashiorkor.
Liquidity ratio is a bank’s cash balance + assets it can easily convert to cash; like vehicles & real estate. A healthy Liquidity ratio must always be maintained because it measures the total liabilities of the bank, which is typically their customer’s cash deposits.
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A liquidity ratio of 30% mandates bank to have current assets of up to 30% against their liabilities. Less than 30% shows that a bank is unhealthy.
“The Asymmetric Corridor of +100/-700 basis points around the MPR” simply means that the Central bank will lend to commercial banks at 23.75% (22.75 + 100). But it will borrow from commercial banks at 15.75% (22.75-700).
Remember that when you see +100 basis points, it means 1%. And when you see -700 basic points, it means -7%.
By this. the CBN is telling the commercial banks not to keep their cash with the CBN & earn so little (15.75%). The CBN is telling the banks to go out there & find lenders in the real sectors so that the banks could earn higher interests.
If the Central bank wants to reduce the cash in circulation, it can adjust this corridor, then pay the commercial banks higher rates, & the banks will move their cash away from their vaults to the CBN, therefore reducing the cash in circulation & inflation as well.
Did I try? I be JJC, abeg no fex. 😅😅
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