The Central Bank of Nigeria (CBN) has announced the upward review of interest payable on local currency savings deposits from 1.4 percent to 4.2 percent being 30 percent of Monetary Policy Rate (MPR) The rate was at 10 percent of MPR before this currently review.
The upward review of interest on local currency savings deposits was stated in a circular released from the office of the CBN director, Banking Supervision, Haruna Mustafa, and issued to all banks. The circular was dated August 15, 2022.
The review of interest on savings deposit by 200 basic points is to take effect from August 1, 2022 according to the circular issued by the Apex bank and this will subsequently take the interest earned by Banks savings account holder to 4.2 percent per annum from the current earning of 1.4 percent which is 10 percent of MPR.
The circular in part reads: “It will be recalled that as part of the efforts to ameliorate the impact of the COVID-19 pandemic, the Central Bank of Nigeria reduced the minimum interest rates payable on local currency savings deposits from 30 per cent to 10 per cent of the Monetary Policy Rate (MPR). This was aimed at stimulating growth in the larger economy following the economic slowdown occasioned by the pandemic,” the circular reads.
“However, following the return to full normalcy and considering the prevailing macroeconomic conditions, it has become necessary to effect an upward adjustment of the interest rate payable on local currency savings deposits.
“Accordingly, effective August 1, 2022, the negotiable minimum interest rate on local currency savings deposits shall be 30 per cent of MPR. This supersedes our letter dated September 1, 2020, referenced BSD/DIR/GEN/LAB/13/052 on the subject.”
It will be recalled that at the last meeting of the Monetary Policy Committee (MPC) of the CBN in July 2022, the MPC had raised Monetary Policy Rate (MPR) by 100 points to 14 per cent due to the persistent rise in inflation rate in the country.
Why is CBN raising interest on local currency savings deposits?
It is the prerogative of the CBN as the manager of the Nigerian economic monetary policy to either pursue an expansionary monetary policy or a contractionary monetary policy.
An expansionary monetary policy ensures increase of money in circulation to boost the economy, provide jobs through increased spendings. Lowering interest rates on local currency savings deposits to discourage savings and low MPR to encourage borrowing was deployed by the Apex bank during the economic meltdown occasioned by the COVID-19 lockdowns. That was to ensure that there are more money in the hands of people to spend on goods and services so manufacturer can continue to produce to cater for continuous demand and that manufacturer have access to bank loans at cheaper interest rates to continue to produce so as to cater for demands of consumers
A contractionary monetary policy is the direct opposite of expansionary monetary policy. Policies deployed to reduce spendings and reduce borrowing are meant to ensure contractions in the economy. And such policies are deployed in the time of increasing cost of goods and services or inflation. The recent increase in MPR and recent increase in interest rates on local currency savings deposits are meant to curb increasing inflation rates in the country.