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Current level of interest rates unsustainable , FMDA President

By Babajide Komolafe
The low level of interbank interest rates   and deposit rates in the economy  is an aberration and not sustainable, says Akinsowon Dawodu, President Financial Market Dealers Association of Nigeria (FMDA).

“At so time in the second half of the year interest rates will rise in response to inflationary pressures”, he said in Lagos on Friday.

Speaking as guest lecturer at the Bi_monthly Public Discourse of Financial Correspondents of Nigeria (FICAN), Dawodu, he noted that the present levels of interest rate in the economy was occasioned by the N620 billion bailout money injected into the eight rescued banks by the CBN and about N800 billion excess crude account fund shared by the three tiers of government as well as the slowdown in lending by banks.

He said there are however factors in the economy that would cause interest rates to rise in the second half of the year.

“Government is going to borrow, as we said there is deficit of N1.8 trillion, the government has to borrow from the domestic bond market, that will help to move interest rate forward a little bit, because when they borrow they take money out of the system and this liquidity will reduce. So that will push interest rates up a little bit.

“If the Central Bank becomes worried about inflation at some point, though the indication they are giving us now is that inflation is not a major concern for them. The major concern is more stability in the financial sector and supporting the real sector with lending and adequate funding.

Inflation does not seem to be a priority now. But the truth is if inflation rises, it would by force have to be addressed, because that kind of instability, whatever else you are achieving can be completely devalued by excessive inflation. You can achieve the other things but excessive inflation takes away the benefits from the wider economy.

So all these things will lead to a correction in the level of rates, because why everybody deserves low interest rates, five per cent ( for thiry days interbank lending) is not really sustainable in an economy like this. Think about pension plans, we are all investors in pension funds, think about it what is that money going into if it is earning three per cent, four per cent and inflation is running at 12.5 per cent, think about the kind of pension you are going to get.

The truth is it is not really sustainable at that level, that is why it has to correct, for a number of reasons, unless inflation is going to come to five per cent. In the long run it is possible but from where I am standing, it doesn’t look very likely. So there would be some corrections but maybe we won’t go back to the high rates of the past”.


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