Nigerian Central Bank Governor Lamido Sanusi made the following comments after a meeting of the bank’s monetary policy committee in Abuja today.
On increasing the Cash Requirement Ratio:
“On the CRR, the reason for increasing it was not primarily about redirecting lending. It is primarily about contribution to stability.
“At the moment, if you look back what happened a few weeks ago we had a lot of pressure on the exchange rate and the only reason we were able to keep the naira stable was because we tightened money and also increased the amount of supply from the reserves of dollars.
“We cannot continue to run down reserves in order to have a stable exchange rate. And in the event of the slowdown in Europe becoming very serious and hitting oil prices, what will happen is that we’re going to have so much pressure on reserves, we may have to rapidly depreciate the local currency and that will feed into an existing inflationary loop.
“So the primary concern is our price stability concern, which is the primary mandate of the central bank and if we have very high inflationary expectations, we should take measures to address structural excess liquidity in the banking system and that is what the CRR increase is supposed to achieve.”
On rising inflationary pressure:
“You have a slowdown in growth, at the same time you’ve got very strong inflationary pressure. The central bank has to continue to focus on price stability and while controlling inflation is not everything, certainly if we lose stability then there will be nothing.
“We already are dealing with structural problems; we’re already dealing with issues on the fiscal side.
“We do not want to compound this matter by having a high rate of inflation.
“Now one of the major concerns we have is that if you look at what is happening in Europe, in the United States, in China, in India and Brazil, you cannot rule out the possibility of a decline in the price of oil.
“And if you have an external shock to reserves and a major depreciation of the currency, that is going to feed into an already existing inflationary pile-up and that will be unacceptable.
“So it is actually better at this moment to tighten money supply, tighten liquidity in the banking system, try to build up those buffers and to prepare ourselves for the fall that will definitely come.”