In another move to manage liquidity in Nigeria’s financial system, the Central Bank of Nigeria (CBN) has announced an increase in the rates for its Standing Deposit Facility (SDF). This adjustment is part of the CBN’s broader strategy to curb excess liquidity and promote more active lending among banks, amid ongoing efforts to address inflationary pressures.
Following the 296th Monetary Policy Committee (MPC) meeting, the CBN announced significant changes, including an increase in the Standing Lending Facility (SLF) rate to 31.75%, the SDF rate to 25.75%, and an adjustment of the Asymmetric Corridor around the Monetary Policy Rate (MPR).
One of the most significant shifts is the revision of the Asymmetric Corridor around the Monetary Policy Rate (MPR) from +100/-300 basis points (bps) to +500/-100 bps. This adjustment is designed to make it less attractive for banks to park excess funds at the central bank and instead encourage them to lend more actively to the private sector.
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The circular detailed the following specifics:
- Commercial and Merchant Banks: They will receive a 25.75% rate on deposits up to N3.00 billion. Deposits exceeding this amount will attract a lower rate of 19.00%.
- Payment Service Banks: They will receive 25.75% on deposits up to N1.50 billion, with amounts above this threshold earning 19.00%.
These new rates are effective immediately, with all authorized dealers expected to comply with the updated guidelines.
These measures, aimed at controlling excess liquidity in the financial system, have sparked a debate over their long-term impact.
The CBN’s decision to raise the SLF rate and the SDF is understood to be born of its commitment to combating inflation. However, the ripple effects of these adjustments are not lost on financial experts, who have voiced concerns about the broader implications for Nigeria’s economy.
The impact of these policies is expected to be felt across various sectors. Banks, now facing higher costs to borrow short-term funds from the CBN, may pass on these costs to consumers in the form of higher lending rates. This could reduce the availability of credit for businesses and consumers alike, further slowing economic activity.
Additionally, the reduction in interest rates for excess deposits at the CBN is intended to push banks toward more active lending. However, with the current economic climate and the rising cost of funds, there is a risk that banks may become more risk-averse, choosing to tighten lending criteria rather than increase their exposure.
Financial analysts believe that while the CBN’s efforts to manage inflation are commendable, the high cost of borrowing will inevitably slow down economic activities. Businesses, especially small and medium-sized enterprises (SMEs), will struggle to access affordable credit, which could lead to a slowdown in investment and job creation, they say.
Others have warned that while tightening monetary policy might be necessary to address inflation, it must be done with caution. This is because the Nigerian economy is at a delicate stage.
It is believed that high interest rates, if not managed properly, could lead to a contraction in economic growth. Economists have advised that the focus should be on striking a balance between curbing inflation and sustaining growth.
The central bank’s move is part of a broader strategy to rein in inflation, which has been exacerbated by a range of factors including rising food prices, supply chain disruptions, and currency devaluation. Yet, the challenge remains to ensure that these measures do not inadvertently choke off the economic growth needed to sustain the nation’s recovery.
While the CBN remains focused on its inflation-targeting mandate, the debate continues over the best course of action. The warnings from economic experts suggest that a more nuanced approach may be required—one that carefully balances the need to control inflation with the imperative to foster sustainable economic growth.