By Babajide  Komolafe

Economic analysts have predicted sharp increase in interest rates, as high as four per cent, and increased inflow of hot money (foreign portfolio investment) into the country.

This prediction is in response to the decision of the Monetary Policy Committee of the Central bank of Nigeria (CBN) to raise cash reserve requirement (CRR) on public sector deposits to 50 per cent from 12 per cent.

“The liquidity gap created at the market is expected to result in a 3-4 per cent spike in interest rates, which are currently at an average of 11.2 per annum. There will also be a reduction in the use of Open Market Operations auctions as a mop-up strategy, which will be unnecessary in an illiquid market”, said analysts at Financial Derivates Company (FDC) Limited. A similar view was expressed by Mrs. Razia Khan of Standard Chartered bank. “By raising the costs associated with public-sector liability mobilisation, it encourages the banking sector to raise deposit rates to compete for other, non-public, liabilities.”

According to Consolidated Discount House Limited, “Deposits rates will go up as banks resume fight over deposit liabilities.

At the end of its MPC meeting on Tuesday, the CBN though maintained its benchmark interest rate, the Monetary Policy rate (MPR) at 12 per cent, and CRR on private sector deposit at 12 per cent, it jerked up CRR on public sector deposits to 50 per cent .

Explaining the rationale for this radical decision in a communiqué issued at the end of the meeting, the CBN said, “The Committee observed the build-up in excess liquidity in the banking system, and expressed concern over the rising cost of liquidity management as well as the sluggish growth in private sector credit, which was traced to DMB’s appetite for government securities. This situation is made more serious by the perverse incentive structure under which banks source huge amounts of public sector deposits and lend same to the Government (through securities) and the CBN (via OMO bills) at high rates of interest’.

Analysts were of the view that the increase in interest rates prompted by the MPC decision, will occasion rise in bond yields. This coupled with appreciation of the naira, facilitated by the decision, will make investment in Nigerian fixed income instruments more attractive to foreign investors.

Consequently this will enhance increased inflow of foreign portfolio investment (hot money) into the economy.

Reviewing this development in the company’s Bi-monthly Economic and Business update, FDC analysts said, “The anticipated increase in interest rates due to the funding gap created would make interest rates in Nigeria more attractive relative to its emerging market peers. This we project would result to an increase in hot money of approximately $1-2 billion. Hot money inflows into Nigeria were estimated at $12bn in Q1’13, which has declined to a current estimate of $10 billion”.