Here’s what CBN’s 1.25% interest on savings deposits means for banks, depositors, economy

Effective Tuesday, September 1, 2020 interest on local currency savings deposits will be negotiable subject to a minimum of 10 percent per annum of Monetary Policy Rate (MPR), according to the directive from the Central Bank of Nigeria (CBN)to commercial banks.

This takes the savings interest rate from 3.9percent to 1.25 percent per annum or 0.104 percent per month.

“In line with the recent market developments, the Bank has reviewed the minimum interest payable on savings deposits as provided in its guide to charges by banks, other financial and non-bank financial institutions issued in December 2020”, the CBN said in the letter.

Aimed at diverting liquidity away from risk-free instruments to the real sector, the new interest rate policy by the central bank means lower cost of funds for deposit money banks, higher inflation rate and dampened depositors’ savings appetite.

“Return on bank deposits will decline which will feed into lower cost of funds for banks, particularly for banks that have huge customer base said, adding that it will defiantly support net interest income,” Ayorinde Akinloye, a research analyst at CSL Stockbrokers Limited.

According to a Lagos-based investment banker, the new interest rate policy further undermines the savings appetite of Nigerians.

“The policy reinforces CBN’s position of stimulating real sector investment whilst 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,” the analyst who asked not to be identified said.

While the low-interest rate on savings account means that depositors will be discouraged to save their monies in the bank, industry analysts expect it to increase consumption and thus, lead to a higher inflation rate.

“The idea is for individuals to consider investing in real economic activities rather than just keeping monies in the bank and will hence, and will also spur consumption,” Akinloye said, adding that inflation may trend higher “because lower interest on savings could lead to increase in consumption and then to demand-pull inflation.”

The reduced interest on savings accounts adds to Nigeria’s already heightened low yielding environment as returns on government short securities and bond have hit a record low.

Meanwhile, the CBN’s financial repression tactics which have sent yields to almost four year low has dampened investors’ appetite whose return on government securities stood at -11 percent in real terms as of August 2020.

The low yielding environment in Africa’s largest economy adds to the country’s burden which has already been put under pressure by the double challenge of COVID-19 and lower oil prices.

Described by analysts to mean negative return on savings and investment in real terms, financial repression implies that Nigerians no longer have many choices when investing their savings, as yields on investment instruments are lower than the inflation rate.

From 2019 to date, the interest rate on government short-term instrument has plunged by 8 percentage points from 12.27 percent in January 2019 to 3.45 percent in the same period of 2020.

Stop rate on the 364-day T-bill instrument stood at 3.34 percent, the highest rate across the three government instruments, as compiled from the auction results for the trading week to August 26, 2020.

“Nigeria needs Nigerians to save and invest in the economy, and this requires a positive rate of return. This is particularly critical for the BoP, as they have fewer options to save and invest,” Andrew S. Nevin, partner/chief economist at PwC, says.

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 effect from October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participation in its Open Market Operations (OMO) at both the primary and secondary markets.