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CBN moves to crash interest rate

Posted by By SEUN ADESIDA on 2008/09/25 | Views: 1940 |

CBN moves to crash interest rate

The Central Bank of Nigeria governor, Prof. Chukwuma Soludo over the weekend disclosed to Daily Sun a series of measures taken by the apex bank to crash the prevailing interest rate in the system.

• Lending rate down 10.58 from 16.5%

The Central Bank of Nigeria governor, Prof. Chukwuma Soludo over the weekend disclosed to Daily Sun a series of measures taken by the apex bank to crash the prevailing interest rate in the system.

According to the CBN governor, “Crucially, CBN opened a window to directly lend to banks on long term basis of up to 365 days at a very cheap interest rate. We are expecting that these measures are going to crash the deposit rate, and subsequently the lending rate in the commercial banks.”

Speaking further, Soludo said: “By borrowing the banks for up to one year and at lower interest rate leaves no incentive for any bank to take deposit at desperate rate of interest of 14 per cent or 15 per cent as being observed before now on 90 days or 180 days deposit when the CBN can lend the banks that money at far below that rate.

Daily Sun gathered that Nigerian interbank lending rates has fallen to 10.58 per cent on average on Friday from 16.5 per cent last week, a day after the central bank announced a raft of measures to boost liquidity. The secured Open Buy Back rate (OBB) dipped to 9.75 per cent from 10.25 per cent, overnight placement fell to 10 per cent from 20 per cent and the call rate dropped to 12 per cent from 19 per cent.

Last week Thursday, the CBN slashed its benchmark Monetary Policy Rate (MPR) to 9.75 per cent from 10.25 per cent, cut banks' cash reserves ratio by half to 2.0 percent and liquidity ratio to 30 per cent from 40 per cent, helping to ease a persistent cash squeeze.
“Interest rates dropped in reaction to the monetary policy committee (MPC's) measures to ease the acute cash crunch," one banker said. Overnight rates hit 20 per cent last week - their highest level this year - due to an acute shortage of the naira currency, which saw banks scrambling for the little that were available to meet their obligations.

Soludo insisted that Nigerian banks and financial system remain sound and safe more so with Nigeria’s foreign reserve at over $63 billion. “We have enough reserve to withstand any shock, foreign capital inflows remains strong and as at the end of August this year foreign capital inflows stood at $8.5billion compared to $5.5 billion as at the end of August of 2007,” he said.

Sounding cautious, Soludo explained that in spite of the safety of our financial system, “we have observed the draught of liquidity in the system because of the aggressive mop up in the past, as well as the credit crunch in the rest of the world, it has dried up some of the facilities being extended to our banks, we decided to inject liquidity into the financial system, the measures we took last week Thursday will potentially put in over N1trillion into the domestic economy.”

On the injections, the apex banker said “Between Thursday and Friday by reducing the cash reserve ratio from 4 per cent to 2 per cent, we have made available immediately about N150billion to the banking system. So, also with the reduction of the liquidity ratio, over N1trillion was immediately made available to the financial system in terms of liquid assets. And the CBN has opened a two-way window to quickly by back these assets if the banks want to release the assets to the CBN.”
On the global financial crisis, Soludo said “You are aware of what has been going on since Monday of last week when Lehman Brothers, Merry Lynch and several other American Banks collapsed and this in effect sent the entire global financial system into turmoil.

Investigation by Daily Sun revealed that a total of 12 American banks have collapsed in the aftermath of the credit crisis that is threatening to consume the entire global financial system. The banks include; Ameribank Inc in West Virginia on Friday became the 12th federally-insured bank to fail so far this year. Following is a list of the banks shut down by regulators, including IndyMac Bank, the largest regulated thrift to fail and second-largest financial institution to close in U.S. history; Silver State Bank, Integrity Bank, Columbian Bank and Trust Co., First Priority Bank, First National Bank of Nevada, First Heritage Bank, First Integrity National Association, ANB Financial National Association, Hume Bank and Douglass National Bank,.

This, the CBN governor said prompted the CBN on Thursday to meet under auspices of the Monetary Policy Committee (MPC) to review the situation around the world and the linkages between the global financial system and the Nigerian financial system.
The apex bank boss said “We reviewed the possible consequences of what is going on globally on our own economy and the prospect in medium. We came to the following conclusions first in spite of what is going on globally, the Nigerian economy remains strong, and I must thank God that we completed our consolidation before the crisis began and today what you hear around the US and the world is consolidation, mergers and acquisitions.”

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