CBN stands firm on LDR policy to curb inflation

The Central Bank of Nigeria has again justified its reliance on the Loan Deposit Ratio to control the country’s rising inflation.

The apex bank also said it is ready to do whatever it takes to reduce the inflation rate.

The CBN’s Acting Director of the Banking Supervision Department, Dr Adetona Adedeji, disclosed this in ‘CBN Talk Today’, a podcast recently uploaded to the bank’s website titled “Loan to Deposit Ratio Adjustment.”

The PUNCH reported that CBN reduced the LDR of banks from the previous 65 per cent to 50 per cent, a move the regulator said would stabilise the economy.

The Central Bank of Nigeria has again justified its reliance on the Loan Deposit Ratio to control the country’s rising inflation.

The apex bank also said it is ready to do whatever it takes to reduce the inflation rate.

The CBN’s Acting Director of the Banking Supervision Department, Dr Adetona Adedeji, disclosed this in ‘CBN Talk Today’, a podcast recently uploaded to the bank’s website titled “Loan to Deposit Ratio Adjustment.”

The PUNCH reported that CBN reduced the LDR of banks from the previous 65 per cent to 50 per cent, a move the regulator said would stabilise the economy.

The PUNCH reported that, at the last MPC, the bank raised the MPR by 200 basis points to 24.75 per cent from 22.75 per cent; and adjusted the asymmetric corridor around the MPR to +100/-300 basis points.

He explained that although the MPC decision limited the ability of bank customers to take loans and reduce the volume of loans accessed by borrowers, it also limited the volume of cash in circulation, a move he noted is good for the financial health of the country noting that any policy that enables banks to lend more, will indirectly increase the money supply and raise the inflation rate.

“There is an inverse relationship between loan-to-deposit ratio, monetary policy rate, and cash reserve ratio. If you are going contractionary, you have to increase both the Monetary Policy Ratio and Cash Reserve Ratio. But to achieve your results further, what you need is to reduce the LDR to control inflation, and that was what the CBN did,” he said.

Explaining further, he said that when the money supply is reduced, the interest rate will also go up.

“The contractionary measure of the CBN means that it wants to reduce money supply. And when an economy is experiencing inflationary pressure as it is currently with Nigeria, it is the duty of the apex bank to ensure price stability.

“To achieve this, the apex bank uses diverse means including the option of adjusting the money supply, the best option is to bring down the LDR to ensure that banks’ ability to lend more to the economy and circulate more cash is reduced,” he said.

While acknowledging the adverse effects of the policy, Adedeji said there must be a tradeoff for the economy to move forward.

“If you look at the traditional Phillips curve, it says you cannot fight two things at the same time, there could be a trade-off. If you are fighting inflation, you cannot fight unemployment at the same time.

“The Phillips curve states that inflation and unemployment have an inverse relationship. Higher inflation is associated with lower unemployment and vice versa. Even if you are going to fight it, it will not be at the desired level. So, you have to choose either to fight inflation or unemployment. Both are key macroeconomic objectives that are very critical to the development of the economy,” he stated.

He said that looking at other economies suffering from high inflation rates, the best thing to do at this time is tracking inflation rather than looking at economic growth at this time.

“We will continue to fight inflation, and when we bring inflation down, we will start talking of economic growth,” he said.

The National Bureau of Statistics reported that in March, the country’s inflation rate rose to an all-time high in the first quarter of the year, at 33.2, which is higher than 31.70 per cent in February and 29.90 per cent in January.

The apex bank listed key drivers of inflationary pressure as the strong exchange rate pass-through to domestic prices, the high cost of energy and other production inputs, lingering insecurity, especially in food-producing areas, and legacy infrastructure deficits.

He said the CBN is committed to ensuring that the inflation rate in the country drops using the right monetary policy tools, adding that the current LDR is aligned with the CBN’s current monetary tightening plan.

He directed all commercial banks to maintain the LDR level and ensure that average daily figures are continually applied to assess compliance.

Adedeji explained that the LDR rate is very important in assessing banks’ capacity to lend, manage risks, and ensure financial system stability.

“We try to combat inflation in different ways but the ultimate objective is to combat inflation. And that is exactly what the central bank is doing today. Whatever it takes to fight inflation, we’re going to do that,” he stated.

“Sometimes it’s not the quantum of credit that you’re able to churn out that matters, but the quality of the credit you’re able to package. In line with the CBN mandate, the apex bank is utilising orthodox monetary policy to manage the economy and LDR is one of the metrics used to evaluate banks’ lending activities, relative to their deposit base,” he stated.

By Daniel Adaji

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