The Monetary Policy Rate (MPR) cut by the Central Bank of Nigeria (CBN) on Tuesday from 12.5 percent to 11.5 percent does not hold good news for bank depositors as it slashes the minimum interest rate lenders pay on savings deposits to 1.15 percent.
This is an 8 percent decline from the initial annual interest of 1.25 percent. With the current annual return on savings deposits at 1.15 percent, customers of Nigerian banks are expected to receive 0.095 percent on a monthly basis.
Effective September 1, 2020, the CBN directed deposit money banks to offer a negotiable interest on local currency savings deposits that is subject to a minimum of 10 percent per annum of MPR.
But, with the MPR cut by 100 basis points the negative interest earned on deposits by Nigerian savers will widen to -12.07 percent from -11.5, when inflation rate of 13 percent is factored.
What this means is that if a depositor saves N1 million in a savings account, while the money would have appreciated in nominal terms by N11,500 (1.15%) to N1.0115 million by the end of the year, the money would be worth 11 percent less in real terms.
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“Savers who have to earn below inflation rate return on their savings would see the value of their money eroded. Thus, by the time repayments are made, the purchasing power of the saved money would be lower, which implies lower income, lower demand and lower output,” according to Ayorinde Akinloye, a research analyst at CSL Stockbrokers Limited.
With the current realities in mind, Nigerian savers are perhaps better served to look for other ways to protect their savings from losing value. The problem with that however is the current subdued interest rate environment in the country.
While interest rates have always been high in Nigeria due to the monetary system in vogue since 2009, which sought to use FGN bonds/T-bills and OMO bills as means of attracting US dollar to stabilise the naira, the recent OMO policy by the CBN, which prevents domestic investors from participating in the auction has sent yields to its worst record.
The returns on government fixed-income instruments have plunged to their worst record as investors use more money to chase after limited investment options.
From a double-digit interest return on government securities like T-bills, yields on the short-term instruments crashed to 3 percent at the last auction on September 16, 2020.
Stop rate on the 364-day T-bill instrument stood at 3 percent, the highest rate across the three government instruments, as compiled from the auction results seen by BusinessDay.
While the low interest on savings deposits is not favourable for bank customers, it is, however, positive for lenders as return on their deposits is expected to decline, and is also likely to feed into lower cost of funds for the banks, particularly for those with a huge customer base.
The rate cut will also help the banks’ net interest income as analysts believe banks with daily liquidity shortfalls will be able to ride on the rate cut to access funds cheaply at the CBN’s lending windows.
While the lenders are expected to start sending notifications to their depositors informing them of the new development, investment bankers see the new interest rate policy as one that will further undermine the savings appetite of Nigerians.
“The policy reinforces CBN’s position of stimulating real sector investment while discouraging perennial investment in financial assets, which creates limited economic value add, given the relatively weak transmission mechanism of financial investments into real sector productive activities,” a Lagos-based investment banker said.
