Interest rate on savings account have been increased by the Central Bank of Nigeria (CBN), as the financial regulator move to reduce money supply in the economy amid rising inflation rate.
What you need to know
The interest on savings account was previously 1.4%, which made savings unattractive. It was reduced in 2020 by the central bank to increase supply of money into the economy.
Low interest rate often encourages investors and companies to invest their money in the economy rather than having it locked away in bank vaults to grow in value without having to spend.
The Godwin Emefiele-led CBN has now increased the savings interest rate to 4.2%, as the apex bank moves to curb soaring inflation rate. This will entice Nigerians into saving, resulting to them dropping their demands for goods, which will negatively impact revenue generated by companies.
In a bid to improve patronage, companies will be forced to cut their prices of goods. In response, there will be a knock-on effect on the growth of inflation, lowering and reducing the rate in the long run.
CBN, in a circular dated August 15, signed by the apex bank’s Director Of Banking Supervision, Haruna Mustafa, and addressed to Nigerian banks, the said the decision was made due to the economy returning to normalcy.
The 4.2% savings interest rate, which took effect from August 1, 2022, is one of the policies that the CBN has made to curb inflation rate, having increased Monetary Policy Rate to 14% last month, from 13% in June.
Naturally, both interest rate and inflation move in opposite of each other. High inflation occurs when interest rates are low, and when the latter rises, inflation rate drops in response.
Note that if the increased interest rate manages to curb inflation as expected by the Central Bank, it will also drop the rising cost of living in Nigeria, as they currently struggle with 19.64% headline inflation rate and 22.02% food inflation.
What the CBN told banks
The circular by the CBN reads; “It will be recalled that as part of the efforts to ameliorate the impact of the COVID 19 pandemic, the Central Bank of Nigeria reduced the minimum interest rates payable on local currency savings deposits from 30% to 10% of the Monetary Policy Rate (MPR).
“This was aimed at stimulating growth in the larger economy following the economic-slowdown occasioned by the Pandemic.”
The financial regulator explained that, “following the return to full normalcy and considering the prevailing macroeconomic conditions, it has become necessary to effect an upward adjustment of the interest rate payable on local currency savings deposits.”
CBN added that, “the negotiable minimum interest rate on local currency savings deposits shall be 30% of MPR. This supersedes our letter dated BSD/DIR/GEN/LAB/13/052 on the subject. September 1, 2020.”
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