• Thursday, May 23, 2024
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BusinessDay

CBN loosens grip on banks’ loans to tame inflation

CBN’s interest rate hike will slow economic growth – Analysts

Lolade Akinmurele & Cynthia Egboboh

Nigerian banks can pull back on loans to businesses after a new directive by the Central Bank aimed at reducing an inflation rate that rose to a 28-year high in March.

The CBN in a circular to banks Wednesday slashed their loan to deposit ratio- a percentage of deposits they must lend- by 15 percentage points to 50 percent “to align with the current monetary tightening,” the apex bank said.

“The new limit is in line with the banks’ required cash reserve ratio, it added.

The move is the CBN’s latest attempt to reduce naira liquidity and tame inflation.

The Abuja-based bank has over the past three months hiked interest rates by a record and stepped up sales of OMO bills- a liquidity tightening tool.

The result has been a steady appreciation of the naira which is the world’s best performing currency this month even though it has come at the cost of shrinking reserves.

Banking analysts expect the move to aid the naira which strengthened to a four-month high of N1072 per U.S. dollar on Wednesday, according to data by FMDQ Securities Exchange, which calculates the rates.

A dollar sold for even less on the streets with traders quoting the greenback at N1000/$.

A persistent rise in inflation is however dampening the gains of the naira rally, complicating the CBN’s effort to deliver positive returns on local assets.

“The banks will be more than happy with the new directive, the rule complicated our lives but it also reinforces the CBN’s monetary tightening policy which will give confidence to investors,” a senior banker said.