If the pronouncement of the new governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, is anything to go by, then the era of high interest rate, and banks’ charges on customer cash deposits are over.
Godwin Emefiele
Addressing a maiden world press conference on Thursday, the apex bank chief abolished with immediate effect all charges on customer deposits, but however sustained charges on withdrawals at 3 per cent for individuals withdrawals exceeding N500, 000 and 5 per cent on corporates exceeding N3million.
He also gave hints that CBN would soon begin sharing with commercial banks the income arising from charges on withdrawals which currently goes entirely to commercial banks.
Although he did not give a timeline as to when the lower interest rates regime would kick off, he said the objective is a reduction in overall lending rates to make it cheaper to invest.
This will mark a remarkable shift from his predecessor’s policy of combating inflation threat at the expense of the economy, such that although CBN achieved single digit inflation rate, benchmark interest rate remained high and crippled manufacturing sector.
Benchmark interest rates have been kept on hold at 12 percent since late 2011, and several measures of tight monetary policy further tightened liquidity, leaving businesses complain high lending rates at about 22 to 25 per cent.
“We shall pursue a gradual reduction in interest rates,” he said. “A comparison of selected macro-economic aggregates from some emerging market countries, including South Africa, Brazil, India, China, Turkey and Malaysia indicate that Nigeria has one of the highest Treasury Bill rates.
“Such high rates create preserved incentives for commercial banks to simply buy virtually risk-free government bonds rather than lend to real sector.”
He said that to enhance financial access and reduce the cost of borrowing credit, there was the need to pursue policies targeted at making Nigeria’s Treasury Bill rate more comparative to other emerging markets.
Emefiele said that while reduction in deposit rates would encourage investment attitude in savers, a reduction in lending rates would make cost of borrowing funds cheaper for potential investors.
“The bank will also begin to include unemployment rates as one of the key variables considered for its monetary policy decisions.
“In the interim, we will continue to maintain a monetary policy stance, reflecting the liquidity conditions in the economy as well as the potential fiscal expansion in the run-up to the 2015 general elections,’’ he said.
On the exchange rate policy, he said the key goal would be to maintain exchange rate stability in view of the high import dependent nature of the economy and the significant exchange rate it passed through in recent years.
According to him, a systematic depreciation of the Naira would literarily translate to considerable inflationary pressure with attendant effect on macro-economic stability.
“Therefore, under my leadership, the bank will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency.
“We will sustain the managed float regime in the management of the exchange rate as this will allow the bank to intervene when necessary to offset pressure on the exchange rate.
“To support this strategy, we will strive to build-up and maintain a healthy external reserve position and ensure external balance,’’ Emefiele said.
The new CBN governor explained that there was no doubt that reducing the interest rate and maintaining the exchange rate was a daunting twin goal.
“In this pursuit, the bank will work with all stakeholders to device measures to ensure the goals are achieved.”
On Financial System Stability, he said the bank would continue to sustain the effective management of the potential threats and avoid systemic crisis.
“The core of my vision is to effectively manage potential threats to financial stability and create a strong governance regime that is conducive for financial intermediation, innovative finance and inclusiveness.
“In this regard, we hope to anchor on two pillars of management factors that create liquidity shocks and zero tolerance on practice that undermine the health of financial institutions,’’ he said.
To achieve the goal, Emefiele said the bank would work with stakeholders to aggressively shore up the reserve and also engage both the fiscal and political authorities.
He assured Nigerians of enhanced banking supervisory purview over the banking system and strengthening of risk-based supervision mechanism to ensure overall health and banking system stability.
Emefiele said he would create a Central Bank that is professional, apolitical, people focused and a bank that would dissipate its energies on building a resilient financial system to serve growth and development needs of Nigerians.
The core of his vision was zero tolerance to practices that undermine financial stability.
An analyst and a senior dealing member of the Nigerian Stock Exchange (NSE), David Adonri of Lambeth Securities and Trust Limited, said reducing interest rates to as a single digit and achieving a single digit inflation would be a sterling achievement for Nigeria’s CBN governor and that such were the policies required to stimulate the economy. However, some other analysts expressed concern that reducing the interest rate too quickly could hurt the naira and stoke inflation if not carefully managed.