Explanation in simple terms and how it affects the Naira.
1) Raising the Monetary Policy Rate (MPR) by 400 basis points to 22.74%**: The MPR is the interest rate at which the Central Bank of Nigeria (CBN) lends to commercial banks. Increasing the MPR makes borrowing more expensive, which can slow down economic activity. However, it can also attract foreign investors looking for higher returns, which could strengthen the Naira
2) Changing the asymmetric corridor from +100 /-300 to +100/-700 around the MPR: The asymmetric corridor system allows the CBN to adjust the liquidity condition in the economy. A wider corridor implies greater flexibility for the CBN in managing short-term liquidity. This could potentially stabilize the Naira, but the exact impact would depend on how the CBN uses this tool
3) Raising the Cash Reserve Ratio (CRR) from 32.5% to 45%; The CRR is the percentage of total deposits that banks are required to keep with the CBN. Raising the CRR reduces the amount of money banks have available to lend, which can slow down economic activity. However, it also reduces the money supply, which can help control inflation and stabilize the Naira
4) Holding the liquidity ratio constant at 30%: The liquidity ratio is the proportion of a bank’s assets that it must hold in liquid form (cash and other assets that can be quickly converted to cash). Keeping this ratio constant means that banks will continue to have a certain level of assets that can be quickly sold to meet immediate cash needs. This can help ensure the stability of the banking system, which is crucial for maintaining confidence in the Naira
These actions could help defend the Naira by controlling inflation, attracting foreign investment, and ensuring the stability of the banking system. However, they could also slow down economic activity by making borrowing more expensive and reducing the amount of money available for lending.
CRR is Cash Reserve Ratio and as the name goes means that commercial banks must keep a certain percentage of their customer deposits in the form of CASH reserves with the central bank. It is like a safe guard for banks for going into liquidation and manage liquidity of banks to lend.
So if for instance total deposit of a bank from its customer is N100million CBN, the CRR used to be 32.5%. Hence the bank must have 32.5million in CASH with CBN. now that it has been increased to 45% it means banks will mop up more customer deposits of 12.5million to keep with CBN.
That N12.5 million would normally be turned into loan but not anymore. Hence lesss funds to lend to customers by banks.
