Breaking News

Making money from MPC decisions

By Babajide Komolafe

The decisions of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) last week has interesting implications for investors. While the decisions portend bad news for some type of investments and investors, they, however, indicate good news for others.

Basically, the Committee decided to reduce interest rates by reducing the Monetary Policy Rate (MPR) from 13 per cent to 11 per cent. The MPR is an indicative or benchmark interest rate which is used to determine other interest rates. For example, banks usually quote savings rate at MPR minus 8.0 or 7.0 per cent. Hence, such rates move according to the MPR. Further, the interest rate at which the CBN lend money to banks or borrow money from banks is tied to the MPR. It used to be plus or minus 2.0 per cent of the MPR, hence, when the MPR was 13 per cent, the CBN lends money to banks at 15 per cent while it borrows (or take deposits) from banks at 11 per cent. But last week, in order to discourage banks from placing their money as deposit with the CBN, and lend to the economy, the MPC decided that the CBN will lend to banks at MPR plus 2.0 per cent two (i.e. 13 percent) while it should borrow (take deposit) from banks at MPR minus 7.0 percent.

To complement these, the Committee also reduced the amount of deposits banks must hold as cash (known as the Cash Reserve Ratio), which also determined how much of their deposits they can lend to businesses. The rate was reduced to 20 per cent from 25 per cent. This directly increased the amount of deposits banks have to lend by N771 billion.

The three decisions mean that there is more money for lending and at a reduced interest rate.

The immediate effect of these decisions is reduced interest rate on savings accounts and term deposits. Thus, except where it is absolutely necessary, it is not expedient to keep your money in a savings account or place it as term deposit in banks. It is not that you will not make money (via interest rate), but the money you will make (returns) will be much lower.

For example, if your money is in savings account with interest rate of MPR minus 9.0 per cent, which amounts to 4.0 per cent interest rate, with the MPR reduction to 11 per cent, the interest on the savings account will fall to 2.0 per cent. Thu, if you had invested N100,000, your interest or returns will fall from N4000 to N2000 per annum.

The reduction in MPR also translates to reduction in interest rate (yield) on Treasury Bills and Bonds, which are forms of lending to government. The reduced interest rate and surplus bank liquidly (cash) environment, provides opportunity for the federal government to reduce the interest rate (yield) it will pay on money it borrows from investors through Treasury bills and Bonds. This means lower interest rate earnings for those who invest in treasury bills and bonds. And this is already happening. Last week, the interest rate at which banks lend to each other fell slightly. For example, Secured lending (lending with collateral) on the average fell to 0.77 per cent on Friday, from 0.91 per cent the previous week. Similarly, interest rate on Overnight lending on the average fell to 1.02 per cent from 1.27 percent. Also, the average interest rate on treasury bills fell to 3.1 per cent on Friday from 5.2 per cent the previous Friday. So, if you are looking for where to get the highest returns on your investment, you have to look beyond bank deposits, treasury bills and bonds.

All rights reserved. This material and any other digital content on this platform may not be reproduced, published, broadcast, written or distributed in full or in part, without written permission from VANGUARD NEWS.


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.