The Central Bank of Nigeria‘s (CBN) campaign to fight inflation by consecutively raising its key interest rate this year seems to have brought hope for savers, as the 1-year Treasury Bill (T-Bills) has risen swiftly. The Monetary Policy Committee raised its policy rate by 150basis points (bps) to 15.50 percent.
According to Coronation analysts in their October 14 note, the 1-year T-bills yield rose by 228 basis points (bps) and the 10-year yield rose by 40bps at the end of the week the Monetary Policy Rate (MPR) was hiked.
“On the day of the rise in the Monetary Policy Rate (MPR), the 1-year T-bill yield was 6.75 percent and the 10-year Naira-denominated bond yielded 13.05 percent. At the end of last week these rates were 9.03 percent and 13.45 percent,” the report stated.
An increase in the level of the Central Bank Rate causes short-term and expected future short-term rates to rise which pushes up interest rates across all maturities (money market tools). Money market accounts are similar to savings accounts but may pay higher interest rates
The monetary committee uses the CBN to set the minimum rate at which investors can borrow. This leads to a similar change in the prevailing market rates.
Coronation analysts in their June 14 note to investors said that the savings rates were slowing down, as market interest rates did not rise much with the May MPR increment, questioning the transmission mechanism between official and market rates.”
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However, in their recent report, they explained that the market interest rates have risen swiftly and have responded faster than after the MPC’s first rate hike in May.
The report states that “the clearest transmission method between the CBN and the financial system is the asymmetric corridor of +100bps and – 700bps around the MPR which impacts the CBN’s Standing Lending Facility (SLF) and Standing Deposit Facility (SDF). Following the rate hike, the SLF and SDF rates are at 16.5 percent and 8.5 percent. “
“One-year T-bill yields are above the lower end of the asymmetric corridor, so to this extent, it seems that this mechanism is working.”
One of the CBN’s other strategies to improve returns on market interest rates was through T-Bills auctions.
“At the last auction on Wednesday, the day after the rate hike, the authorities supplied more than what matured for the first time since June 2022. This led to the yield on the auctioned 1-year T-bill rising by 283bps to 13.63 percent,” the October 4 report by coronation stated.
Also, at the last MPC meeting, the Cash Reserve Requirement (CRR) was increased by 500bps meaning that banks are required to deposit 32.5 percent of customers’ deposits with the CBN.
The report said that with system liquidity already tight, we might start to see banks turning away deposits or be forced to raise deposit rates further.
It explained that banks turning away from deposits would make money market funds attractive to savers.
“This translates for savers; the former would mean the attractiveness of Money Market funds would increase as savers would want to take advantage of elevated rates.”
Ibrahim Tajudeen, Director, Research and Strategy at Chapel Hill Denham explained that it is normal for a hike in MPR to translate to a hike in other market rates, as it is the benchmark for other rates, so when it moves others move.
He went further to explain why the third increment translates to the savings rate rising.
“The size is now significant, 400 bps in total is why we see a corresponding increase in other market rates. The cumulative spike is huge,” he said.