LAGOS, Nigeria (VOICE OF NAIJA) – The Central Bank of Nigeria, has validated and defend its decision on Loan to Deposit Ratio (LDR) policy introduced to control rising inflation in the country.
The apex bank insisted that it remain focused to do all in it capacity to drop the country’s inflate rate.
This, was revealed by the CBN’s Acting Director of the Banking Supervision Department, Dr Adetona Adedeji in its on ‘CBN Talk Today’, a podcast titled “Loan to Deposit Ratio Adjustment,” uploaded to the bank’s website lately.
Adedeji asserted that the apex bank utilised LDR as part of proactive measures in order to stabilise the economy amidst rising inflation
He said, “This policy was created to ensure that money flows into the real sector of the economy. The LDR then was set at 60 per cent, and later increased to 65 per cent before it was last week reduced to 50 per cent. And if you want to combat inflation using the orthodox method, you need to balance what you do with the monetary policy tools and other measures.”
During the last MPC meeting in March, the CBN Governor, Olayemi Cardoso clarify the need to tackle inflation rise with monetary policy tools as it raised the MPR by 200 basis points to 24.75 per cent ; and adjusted the asymmetric corridor around the MPR to +100/-300 basis points.
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Adedeji highlighted reasons for the money market regulatory body to spooked on severe measures to fight domestic inflation was based on the needs to keep the rise in check as this would limit the bank’s to grant loans to customers, which in turn difficult for borrowers to access loans.
This decision, he said would limit the volume of cash in circulation and was a good move for the financial health of the country.
“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 many school of thought disagree on the policy based on the adverse effects, Adedeji stated that 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.
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“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 the apex bank plunged into tracking the inflation through lowering rates as against eyeing faster GDP growth.
“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,” – Punch reported.
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.