This should mean an increase in fixed deposit rates, because the annual rate of 3-5% is very POOR for local and foreign portfolio Investors

kwynette:
this is not a science or art matter, its a matter or national security, don't be limited by your discipline, broaden your horizon

broaden horizon ko broaden diagon ni, nor be dem say make we dey wait for the classical economists make dem come explain, why should I be so concerned about an economy that doesn't favour me ?

Seun:
It's idiotic to tighten the supply of money during a recession. This is how the Great Depression came to be. Economists, please back me up.

The economy growth is going down, yet Inflation is rising. Despite the cbn's stunt in the past of reducing the CRR & MPR, so banks will be able to stimulate the economy by giving our loans @ a lower rate, it didn't work! So what we have is STAG-FLATION.....CBN had to pick their battle, they either fight inflation or improve growth...at the moment, fighting Inflation seems to be what's on their agenda based on this news #Not an economist by the way

linearity:


This is just a 9% increase on a currency that fluctuates about 10% from week to week....The risk is too high for any investment to start saving in Naira, (plus Naira is not a reserve currency) for a mere 9% return at the end of each year, when he/she stands a chance of loosing almost 10% from week to week (or month to month), I do not see the risk-reward ratio tipping the scale in favor of saving in Naira or keeping Naira, which is the intended objective behind this policy.

If Naira were stable, then it would have been plausible to assume that, we will see those benefits, but with the current condition, it appear; the negatives are more likely to follow.

True talk!
If the CBN wants to really save the Naira it must come up with better policies. This is just no no for me. The current free fall of Naira in the parallel market is difficult to control since internationally the FOREX market activities can't be regulated. So it has to come up with poliicies that will affect or effect changes to MDBs in Nigeria that do business in such markets, increase in CRR is not the only way.

Although there is inflation no doubt, bt wen was der ever an increase in money supply. I feel this inflation s nt mainly caused by an increased money supply, bt hoarding of products, high cost of importing dese goods ,derby increasing der prices, also d petty traders in d market, who uses d exchange rate as an excuse to make supernormal profits. Using contractionary monetary policy, to me s not whats best.

Joenyam:

I'm not, never offered the course at any level. Just picked it up as a leisure course, I find it very interesting. I'm an Engineer

Ok

lordcyl3:
which kind year be this... no single relief news since this yr

so d ppencil exportation n the eventual 400,000 youths that will be employed directly n indirectly from that company no be goodnews?

Adesiji77:


http://www.vanguardngr.com/2016/03/cbn-tightens-money-supply-raises-mpr-to-12/

Emefiele will end up in jail.idiot.keep helping the banking sector especially zenith. Thief

Seun:
It's idiotic to tighten the supply of money during a recession. This is how the Great Depression came to be. Economists, please back me up.

This is not the change. The purchasing power of the people will reduced and crime increase.We should learn from 1929 great depression in the USA

davide470:
Errm. Let me help small before they come:

Banks won't be using more of your money to trade and make money for themselves..They will learn how to save too (CRR increased to 22.5% from 20%)

CBN will charge this when they lend to banks, so therefore, banks would fire it down to the layman.. In other words, go and look for your own money, and leave them alone (MPR increased to 12% from 11%)

If you by mistake check google and see that your bank's liquidity ratio (money to pay igbese) is below 30%, sharply go close your account. Them no get money to show off like that (Liquidity ratio at 30%)

Hope this helps.

well broken down. Also high interest rate attracts foreign investor to the FGN bonds thereby drawing in dollars that will stregthen the Naira.

walexy30:

well broken down. Also high interest rate attracts foreign investor to the FGN bonds thereby drawing in dollars that will stregthen the Naira.

True that.

Aside Ghana, we have one of the world's best 'foreign investment attractive' interest rates.

Allwility:
Good one in the short term but not really a good one long term.

Here's a breakdown of what's happening.

The economy is heading towards a recession and people taking advantage of the disparity in forex isn't helping matters. Hence the excess cash in the system leading to inflation.

Banks borrow from the CBN and they pay interest on what they borrow. The banks in turn lend the money to you and I and a certain interest is charged. I'm sure you are familiar with that.

Now, the CBN can reduce inflation by increasing their interest rates on money lent to banks so as to mop up excess cash in the system. To meet up, the banks increase their rates on whatever they lend to you as well as introduce all those hidden charges when you bank with them.
Now if my secondary school economics is still good enough, I believe these might be the likely implications:

1. The banks will increase their interest rate when you go to borrow from them.
2. Inflation will reduce in the nearest short term.
3. Because of the high interest rate, you will consider not borrowing from the banks.
4. This will result in the economy slowing down! The economy will look good on paper but the common man on the street will feel the pinch.

I have always canvassed that the way out of our impending recession is increased investment! That's what Soludo (God bless that man) canvassed for before he left office. Investment led by the manufacturing sector!! That's what the US did when its home market crashed because of the 2008 recession. If the govt stimulates the economy by entering into PPPs and other favorable policies, millions of jobs would be created, and taxes can be increased to checkmate any excess liquidity. At the end of the day, the inflation would be down, there would be jobs, the common man happy and the government too.

Win- Win Solutions!!!

Nice analysis. Well done.

"Inflation is always and everywhere a monetary phenomenon" The primary driver of inflation is the growth in money supply. I guess that explain the reason why it seems to be the first point of call for CBN given the recent rise in inflation level. This might go a long way to curtail inflation -as less money chases available goods, also, it might probably limit the extent to which public expenditure is channelled towards imports which will of course strengthen our Naira via improved net export.

Also, increased interest rate relative to the international interest rate might translate to capital inflow and that also will improve our capital account balance, thus, sustaining naira.

As pointed out, increase CRR should reduce the level at which arbitraging and speculative move among banks affect naira.

As for investment, how about viewing it from the angle that this means more savings will be available for investment, as saving may become more attractive in the face of increased rate.

Pls note that, the MPR is just a benchmark for other rates in the economy.

psalmsonovic:
what this really means is that,
As CBN increases interest rate from 11% to 12%..this would have effect on the rate at which people borrow money from banks. Because, interest rate has an inverse relationship with investment, so people would be reluctant to borrow cos of the interest on the capital they are to return back, so rate at money supply grows will reduce.
And with the increase of RRr(required reserve ratio), the reserves the deposit money banks will have to keep in their vault will be increased, tightening credit creation by the commercial banks and also having little to give out to the layman in terms of loan.
So at the end money supply will be reduced and inflation will also reduce and thereby having effect on aggregate demand...The layman on the street will feel this in the long run but not immediately.
I think this policy is not the very right thing to do because we have a pressing issue, which is unemployment..which should be tackled with more investment in the manufacturing sector..I think unemployment should be tackled first and then inflation prevention policies will work well.

What if the inflation is not caused by increase in cash in circulation but actual reduction in supply. Almost all cash are moved out of the country machinery purchase, raw materials, schooling. Why not fix the problem directly tackle supply and the inflation goes rather than pushing us into recession

Seun:
It's wrong to tighten the supply of money during a recession. This is how the Great Depression came to be. Economists, please back me up.

hmmmm true

Stycon:
"Inflation is always and everywhere a monetary phenomenon" The primary driver of inflation is the growth in money supply. I guess that explain the reason why it seems to be the first point of call for CBN given the recent rise in inflation level. This might go a long way to curtail inflation -as less money chases available goods, also, it might probably limit the extent to which public expenditure is channelled towards imports which will of course strengthen our Naira via improved net export.

Also, increased interest rate relative to the international interest rate might translate to capital inflow and that also will improve our capital account balance, thus, sustaining naira.

As pointed out, increase CRR should reduce the level at which arbitraging and speculative move among banks affect naira.

As for investment, how about viewing it from the angle that this means more savings will be available for investment, as saving may become more attractive in the face of increased rate.

Pls note that, the MPR is just a benchmark for other rates in the economy.

Nice analysis!

Jico87:


What if the inflation is not caused by increase in cash in circulation but actual reduction in supply. Almost all cash are moved out of the country machinery purchase, raw materials, schooling. Why not fix the problem directly tackle supply and the inflation goes rather than pushing us into recession

Mhen, you have taken the argument to supply side. Nice one..But the CBN has no direct hand in this.

Out of all the terrible decisions of CBN recently, this one takes the cake! how can you tighten funds in an ailing economy? how do you expect jobs to be created? manufacturers are already crumbling under the weight of ridiculously high exchange rate now they have to pay more as interest? clearly CBN has lost it!

I can only talk of two things here.
The interest rate and the reserve ratio.

These are measures the central bank uses to control the commercial banks when their is inflation.

The interest rate.... the central bank discount bills to the commercial banks and wen these bills are discounted at higher interest rates it forces the commercial banks to increase the interest rate on loans and when dis is done, people and organisations will be discouraged frm borrowing money from banks. So dis leads to a reduction in the amount of money in circulation because inflation is caused when there is excess money in circulation.

The reserve ratio...since the central bank increased it reserve ratio frm 20% to 22.5% the lending power of the commercial banks will also reduce because they've been asked to keep a greater proportion of their money with the central bank and wen they do, they will be left wit less money and dis is done to reduce the lending power of the commercial banks which will reduce the volume of money in circulation too.

these measures as stated by the CBN is to reduce inflation...which is what we need right now cos their is too much money in circulation that buys only fewer goods.

Is a welcome development.

Ecoplexus:
This will discourage investments and entrepreneurship as those looking for loans to set up businesses will be greatly affected.

Do banks give loans to real entrepreneurs? Except the rich politician who secure govt contracts. This has been one of the reasons why small and medium scale industries are not growing in Nigeria. Check the list of the bank debtors published sometime ago most are rich politicians.

Chukzyfcb:
This should mean an increase in fixed deposit rates, because the annual rate of 3-5% is very POOR for local and foreign portfolio Investors

I don't know why they had to drastically reduce the interest rates when obviously the lending rate by banks remained the same. Cbn policy under emefiele has been really inconsistent.

demzey:
Although there is inflation no doubt, bt wen was der ever an increase in money supply. I feel this inflation s nt mainly caused by an increased money supply, bt hoarding of products, high cost of importing dese goods ,derby increasing der prices, also d petty traders in d market, who uses d exchange rate as an excuse to make supernormal profits. Using contractionary monetary policy, to me s not whats best.

Abi o my brother. When was there ever a drastic increase in money supply? Salaries which is a major source of money supply into the economy has remained stagnant for many years now so what do they mean by excess liquidity?

ayoolanr:
How in the world do you raise interest rate when your economy is heading for or already in a recession? How did these people get their jobs for goodness sake? Pls someone pinch me, I must be dreaming! Chei, naija don suffer oh, is it that the IQ level in Nigeria is in the negative? Invest in manufacturing, spend money in road construction and infrastructure....the idea is to stimulate the economy not stunt it for goodness sake! These goons are looking for a solution that is not directly applicable to the problem! I am not an economst but I think this is common sense!

When idiots are in charge

demzey:
Although there is inflation no doubt, bt wen was der ever an increase in money supply. I feel this inflation s nt mainly caused by an increased money supply, bt hoarding of products, high cost of importing dese goods ,derby increasing der prices, also d petty traders in d market, who uses d exchange rate as an excuse to make supernormal profits. Using contractionary monetary policy, to me s not whats best.

Nice analysis, however you can never take away the major cause of inflation which is more money chasing fewer goods.

The previous rates discouraged people investing in banks. With fixed deposits at 2.5 percent and treasury bills for about 180 days at about 6percent as against the 15percent of early last year, people were no longer keen on fixing in banks or lending to government through tbills. This led to Nigerians leaving easy money in accounts which they could readily have access to.

The singular reason for this improved rates is to enable government (through the financial sector) mop up more cash from the economy. The rates make it more attractive to invest more in banks, creating greater liabilities for the banks.

Notice the liquidity ratio was not touched. Liquidity seeks to measure the level of ready cash at a bank's disposal. This was deliberate to still give banks enough threshold to mobilize more cash without being in danger.

This policy is just a ploy to reduce the amount of money in your hands, but the question is;

Would it work?

Am not surprised he comes from an institution that is not customer friendly, so he can't make customer friendly policies.

gradeA:


Nice analysis, however you can never take away the major cause of inflation which is more money chasing fewer goods.

The previous rates discouraged people investing in banks. With fixed deposits at 2.5 percent and treasury bills for about 180 days at about 6percent as against the 15percent of early last year, people were no longer keen on fixing in banks or lending to government through tbills. This led to Nigerians leaving easy money in accounts which they could readily have access to.

The singular reason for this improved rates is to enable government (through the financial sector) mop up more cash from the economy. The rates make it more attractive to invest more in banks, creating greater liabilities for the banks.

Notice the liquidity ratio was not touched. Liquidity seeks to measure the level of ready cash at a bank's disposal. This was deliberate to still give banks enough threshold to mobilize more cash without being in danger.

This policy is just a ploy to reduce the amount of money in your hands, but the question is;

Would it work?

Nigeria is definitely in for serious trouble. If the Apex bank is unable to figure out what the problem with the economy is then there is cause for alarm. Surplus money chasing too few goods is Demand-pull inflation which is obviously not what Nigeria is experiencing. What we are experiencing is a cost-push inflation caused by shocks in the economy such as a sudden and sharp decrease in the price of crude oil which accounts for a huge proportion of government revenue. This situation led to devaluation of the Naira since the the government had to raise the exchange rate to realize more Naira from the dwindling revenue from oil export. The spiral effect of the increase in exchange is that manufacturers, importers now need to pay more Naira to buy dollars in order to fulfil their obligation to their foreign suppliers. Subsequently, these manufacturers pass the cost to the consumers and inflations escalates.

CBN's decision to increase the interest rate can be compared to having a noose around one's neck being pulled on both sides by strong forces. Manufacturers who are already crumbling under the weight of high cost of on raw materials (most manufacturers depend heavily on importation of raw materials)due to the ridiculously high exchange rate now have to face another challenge of paying more interest on loans. The implication is that production for most companies will either reduce or come to a halt. Supply decreases and the price of commodities will increase. Inflation digits will double.

What CBN should be doing is pursue policies that will boost production and promote exports. US experienced severe depression in the early 1930s. The depression was fuelled by the Fed's decision to cut money supply to the economy. The depression was so severe that it spread to other countries of the world. Most people were out of Jobs and a lot committed suicide. Surely CBN Governor and his directors forgot to learn from history while in school.

South Korea was once one of the poorest countries in the World with a Per capita income below $100.South Korea under President Park Chung-hee launched economic and social development plans, and soon the economy began to grow. Today, South Korea in one of the world leaders in exportation of several commodities ranging from auto-mobiles to different types of electronics. So also countries like Argentina and Japan.

CBN should take a cue from this and stop making decisions that will expedite the failure of the economy. The video below is one that the CBN Governor and president Buhari his boss should watch.


https://www.youtube.com/watch?v=1KDf6lUFWcc

inflation is caused by too much money in circulation but the question is where is the money in economy? when has money supply increased? when has CBN reduce interest rate so as to increase investment? As far as I'm concern the high inflation rate is not caused my too much money in the economy because NO economic decision have been made towards increasing money supply. have always said it, Nigeria need to increase investment and not discourage it. this step by CBN is bad for the economy because an economy heading towards recession need to be revive not by decreasing the investment potential. even if the increase in interest rate reduces inflation as stated and proved in other economy, but it's when there is enough money in pocket of individuals (disposable income) that is when you try to mop the money, but in nigeria the minimum wage has never been increase and you say too much money is in the economy.

another wrong step in d wrong direction....even wen he knows dat it will worsen d whole situation...madness

Dharniel:
when the economics guru decide to tackle Nigeria's economy problem with laws and principles in economics when the conditions in Nigeria doesn't even obey the simple laws of demand and supply.
sorry is the case...

True talk my brother. How many people borrow money from banks for consumption? In US, and other countries, people borrow money to purchase cars, houses, electronics and household items, that is where such policies are applicable.

lanre316:
Wait a minute. Is this interest rates mandated on loans you get from banks or interest on your savings/deposits in banks.

Beats me.
I think its an attempt to take money out of circulation and lower the inflation rate which is over 12%.
Its time to go back to treasury bills, I believe they're not taxed.

mark3009:

I don't know why they had to drastically reduce the interest rates when obviously the lending rate by banks remained the same. Cbn policy under emefiele has been really inconsistent.

I think they offered reduced lending rates to only those into the manufacturing sector. But it wasn't low enough to attract manufacturers, one of the reasons our economy growth is steady declining. Yes I agree with you, their policy is very in-consistent.
praticing trial & error method.