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Interest rate cut to 11.5% means more liquidity for banks, savings rate drop

… analysts see no spike in credit growth … say confusing message around Nigeria’s willingness to re-open FX market

Nigeria’s central bank’s surprised deeper easing of its benchmark interest rate by 100 basis points to 11.5 percent yesterday from 12.5 percent in May 2020 is seen to translate to more liquidity for banks and further drop in savings rate.

After the two-day Monetary Policy Committee (MPC) meeting in Abuja between Monday and yesterday, Godwin Emefiele, governor of the CBN, also announced the adjustment of the asymmetric corridor around the monetary policy rate (MPR) to +100bps/ – 700bps from (+200bps/ – 500bps) previously.

This is in spite of recent pressure on inflation caused by higher food prices and the expectation of further pressure in the near-term as power sector and fuel subsidy reforms get underway.

Nigeria’s inflation rate rose to 13.22 percent in August 2020, highest recorded in 29 months, since March 2018, when it stood at 13.24 percent.

“This was a deeper easing than we would have expected at this stage,” Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said.

According to Khan, the action of easing policy while inflation is still accelerating sends – at best – a confusing message around Nigeria’s willingness to re-open the FX market. With little additional messaging around FX policy intentions, the CBN appears to have stepped back from action that might have had a more immediate impact on inflation expectations.

The effect of this cut will be to push the rate on the standing deposit facility (the lower corridor around the MPR) even lower, to 4.5 percent (from 7.5% earlier).

In the Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020/2021, the CBN stated that the remunerable daily placements by banks at the standing deposit facility (SDF) shall not exceed N2 billion. Any deposit in excess of N2 billion shall not be remunerated; and SDF deposit not exceeding N2 billion shall be remunerated at the interest rate prescribed by the MPC from time to time.

This is more in line with existing market rates – correcting what previously looked like a bigger mismatch between the policy rate and market interest rates. However, with banks still likely to face an upper limit of N2 billion, as the amount that can be placed with the CBN, this will force banks to do something else with any additional liquidity, Khan said.

Bismarck Rewane, managing director, Financial Derivatives Company Limited, does not believe that the reduction in interest rate will not lead to a weakness in the currency because the currency values have been held very strongly by inflows of foreign portfolio investments and some borrowing.

“My view is that there will be some stalking of inflationary pressures. I think that the Marginal Propensity to Save (MPS) will be reduced, so national savings to GDP will come down and the international flows will also be negatively impacted.

“The CBN was between a rock and a hard place. The most important thing would have been to hold at this time to allow these things to materialise. So, let us see if the reduction will make an impact, but I doubt if there will be a spike in credit. I doubt if it will deal with the unemployment issues in terms of materiality, and I doubt if it will ease the currency pressures,” Rewane said.

Reacting to the development, Gbolahan Ologunro, a research analyst at Lagos-based CSL Stockbrokers, commented, “The recent decision by the MPC to reduce the MPR is aimed at aligning market rates with the MPR, given the current wide divergence.

“More importantly, this corroborates the apex bank’s agenda in stimulating credit creation in the economy through reduction in lending rate amid declining output. Recall the CBN reduced the interest on savings deposit to 10 percent of MPR from 30 percent in order to drive down cost of funds for DMBs and in turn support lower lending rates.

“With this decision, the interest rate on savings accounts will trend further downwards. However, this may not translate into any meaningful improvement in loan creation in the economy, as banks will likely remain cautious in expanding their loan book due to the multiplicity of headwinds in the operating environment.”

The CBN on September 1, 2020, ordered all Deposit Money Banks to review interest rates on savings accounts to a minimum of 10 percent of the MPR.

Omotola Abimbola, a macro and fixed income analyst at Lagos-based Chapel Hill Denham, said, “The policy decisions suggest CBN is still pro-growth, despite recent deterioration in its twin mandates of FX and price stability. While the easy monetary policy could help counterbalance the recent fiscal adjustments in the energy sector, there are possible negative feedbacks on savings rate and macroeconomic stability that the CBN has to carefully monitor.”

Also commenting, Ayodele Akinwunmi of FSDH Merchant Bank, said, “Under the current situation, there are other overriding issues in the economy that are not monetary issues that need to be addressed before some of these policies can be very effective.

“The solutions to these problems are beyond what MPC can address. So, they have positioned their policy to where they want to achieve their objective, but however for you to be very effective, there is need for other complementary fiscal policies to ensure that they achieve the broad objective of stimulating economic growth and then job creation.”

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