By Babajide Komolafe

Cost of funds in the interbank money market fell significantly yesterday following the decision of the Central Bank of Nigeria (CBN) to leave its anchor interest rate, Monetary Policy Rate (MPR) at 6.25 per cent.

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On Monday, cost of funds had risen due to anxiety over the outcome of the Monetary Policy Committee meeting of the apex bank, which Monday to Tuesday.

There were apprehension that the MPC might further increase the MPR. But in a communiqué issued at the end of its meeting yesterday, the MPC decided to retain the MPR at 6.25 per cent based on, “need to retain flexibility and allow the effect of the previous rate increase to work through the system’’. The Committee at its previous meeting raised the MPR by 25 basis points to 6.25 per cent .

The Committee however narrowed the band around the MPR to 200 basis points by increasing the lower band, to 4.25 per cent, while the upper band remains at 8.25 per cent. The lower bank is the interest rate the apex bank pays on money deposited by banks, while the upper limit is the interest rate it charges on money it lends to banks.

As a result cost of funds fell in the interbank market by one fifth. Interest rate on Call,  Seven Days, and 30 Days lending  fell to 4.25, 7.0, and 9.8 per cent from 9.25,10.3 and 12.1 per cent respectively.

Commenting on the decision of the apex bank, Regional Head of Research for Africa, Standard Chartered Bank said, ‘’Given macroeconomic conditions, this should not come as a huge surprise.  Growth in monetary aggregates remains below trend, and the CBN would have been wary of a full-blown tightening at this stage of the cycle.

Nonetheless, given persistently high inflation and recent pressure on foreign reserves, there would have been a need to signal the ongoing intention to maintain tight policy, or perhaps even tighten policy further over the course of next year.  Hence the measures to narrow the band around the MPR which is consistent with the overall policy bias of the central bank.’’