Nigeria’s 14% Central Bank Rate

Nigeria’s 14% Central Bank Rate

How the U.S. interest rates have gone downwards could explain the impacts of policies. Just in less than four decades, U.S. Federal Reserve (central bank of the U.S.) has moved rates from high 20% to now sub-3%. Thinking deep into that, U.S. makes debtors smarter while savers frowners. But as those happen, asset values are inflated with cheap capital everywhere. But do not worry – they have systems to seem to manage those until there is a black swan. Irrespective, the people that call the economy, Wall Street, love it.

I began my career in the days when the fed funds rate hit 20%. In the late 1980s, it topped out just short of 10%. At the end of the 1990s, it peaked at 6.5%. Even many millennials can remember June of 2006, when the Fed’s rate hit 5.25. The suggestion that 2.5% will be this cycle’s top is staggering. (Fortune Newsletter)

In Nigeria (certainly we have different economic structures), the fight on inflation has not given Central Bank of Nigeria (CBN) tools to use cheap rates to inject liquidity and stimulate the economy. Yet, we need to find a way since markets have become globalized.

If you have a nation that gets capital from the (Fed) basis of 2.5% and another at 12%, there is no strong basis to compete against because another has asymmetric advantage.

See it this way: if a bank gets capital from CBN at 14% (the current rate) and has to keep 1% to meet required ratios from NDIC (the deposit insurance commission), by the time it takes care of operating expenses, it cannot practically lend below 17%. Then imagine if the bank has started with 2.5%, you will then experience lending interest rate of say 5% in Nigeria.

The Central Bank of Nigeria decided unanimously to keep the benchmark interest rate steady at 14 percent on January 22nd 2019, as widely expected. The last time policymakers changed rates was in July 2016, when they lifted the monetary rate by 200 bps. The Committee voiced concerns about inflationary pressures in the first half of the year, amid an increase in spending ahead of general elections and disruptions caused by recent flooding. In December, the annual inflation hit a 7-month high of 11.44% from 11.28% in November, well above the Bank’s target of 6.0%–9.0%. The Nigerian economy is projected to expand 2.28% this year, the CBN Governor Emefiele said. Interest Rate in Nigeria averaged 10.94 percent from 2007 until 2019, reaching an all time high of 14 percent in July of 2016 and a record low of 6 percent in July of 2009.

This is also the reason why when people accuse banks of high interest rates rip-off, I laugh because commercial banks are not to be blamed: the CBN sets the basis and banks cannot operate below the basis if they want to be in business. If CBN says rates begin at 14%, there is no sense for accusing banks of not giving cheap capital in Nigeria.

Fourteen percentage is a bad basis! Yet, CBN cannot be blamed as it has to fight inflation. The solution is redesigning the economy to improve productivity and move all from the spend-all-till-you-drop mentality in Nigeria.

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