CBN removes cap on interest rates

Proshare

August 11, 2006/punch

 

 

 

The Central Bank of Nigeria has said that interest rates will now be determined by market forces.


Banks, it added, were no longer restricted to rates not above four per cent of the Minimum Rediscount Rate. The MRR is the benchmark rate issued by the Central Bank.


The bank also announced that the external reserves, which came down to $32billion after the draw down of $4.6billion in April to pay the Paris Club, had risen to $38billion by the end of July.


The CBN Governor, Prof. Charles Soludo, announced these developments at a press conference after the banks Monetary Policy Committee Meeting in Abuja on Wednesday.


He also decried the growing liquidity in the economy.

Banks in the country had in 2002 committed themselves to an agreement with the CBN not to charge more than four per cent above the prevailing MRR in their lending to customers.

Although most of them did not stick to the agreement, they continued to enter rates that were within the agreed band in their books.

Announcing that the MRR would be maintained at the current 14 per cent, Soludo gave the indication that it could be changed at any time should pressures on inflationary rates persist.

According to him, the CBN has abolished the policy as it now favours floating rates.

Soludo attributed the increase in total money available in the economy to the increase in lending to the government, the monetisation of excess crude oil earnings as well as the issuance of N75billion bond by the Federal Government to clear pension arrears.

He said, Broad money grew by 34.69 per cent as at July 2006 over the level in December 2005 which represented an annualised growth rate of 59.46 per cent compared with the target of 15 17 per cent for 2006.


The rise in money stock was due to a combination of factors which included the credit to government, which increased by 16 per cent in June as against 0.4 per cent programmed target reflecting sustained expansionary fiscal operations.”

The CBN boss also indicated that given the trend of economic development, the target growth rate of 10 per cent was likely to elude the nation.

According to him, the decline in oil production as a result of instability in the Niger Delta will negatively affect the capacity of the country to meet the target, even though the growth in the non-oil sectors is on target.

At the end of June, inflation rate stood at 13.6 per cent, down from 16.3 per cent recorded at the end of March.

The Monetary Policy Committee, however, noted that the rate was too high.

Soludo said, The MPC observed that the overall downward trend in inflationary pressure reflected the effects of monetary policy tightening to address the excess liquidity in the second quarter as well as the appreciation of the exchange rate.

Nevertheless, some threats to the sustenance of low inflation still exist. They include the planned supplementary budgetary expenditure of the government and rising private inflows, both of which are likely to shore up liquidity in the system.”

On exchange rates, the CBN Governor expressed happiness that the nation had achieved stability and convergence between the official rates and Bureau de Change rates (convergence is achieved when the disparity between the two rates is not more than three per cent).

He also noted that growth in domestic credit in the first six months stood at 15.2 per cent, while reserve money stood at N794billion against the target of N800billion.

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