On Tuesday, the Central Bank of Nigeria (CBN) directed banks to pay at least 4.65% interest on savings deposit accounts; a remarkable move which is believed will motivate depositors to save.
The new interest rate is an uptick from the 4.2% that the CBN had earlier directed banks to implement. It comes on the heels of the Monetary Policy Committee (MPC)’s decision to raise interest rate to 15.5% from 14% to combat rising inflation.
The decision to raise interest on savings deposits is believed to be geared toward limiting the amount of money in circulation due to its potential to encourage bank customers to save.
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Last month, when the CBN directed banks to implement at least 4.2% interest rate on savings, the apex bank said that it had been reduced to 11% previously to cushion the effect of Covid on Nigeria’s economy.
“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% to 10% 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 CBN said.
The new rate is in line with the Monetary Policy Rate (MPR), which the CBN uses as lending benchmark in the financial services sector. The apex bank also uses 30% of the MPR as a benchmark of interest rate on savings deposits. When the MPR was pegged at 14%, interest rate on savings deposits was 4.2%, representing 30%. With the MPR at 15.5%, interest rate on savings deposits has been moved to 4.65%, also representing 30%.
The negotiable minimum interest rate on local currency savings, which took effect on August 1, was recently moved from 10% to 30%.
However, while an increase in the interest rate on a savings deposit is designed to serve as a form of contractionary monetary policy, bolstering savings, it falls woefully short of what is actually required to motivate depositors.
This is because, as Nairametrics noted, inflation has risen above the rates, causing monies under savings deposit to lose purchasing power over time. This means that overtime, with higher inflation rate eclipsing interest generated on savings, depositors will lose money.
Nigeria’s inflation rate rose to 20.52% in the month of August 2022, from 19.64% recorded in the previous month, the highest in 17 years. This means that the increase on savings deposit interest will bear no meaning.
Many Nigerians have been converting their savings from naira to dollar in a bid to preserve its value.