TIME WILL TELL

In a move that resembles that of Mr. Magic, the CBN  crashed interest rate on bank deposits to the low single-digit level.
A 50million naira 30 days fixed deposit for example now attracts only a maximum of 4 percent as against an average of 10 percent as of November last year.
To achieve this fete, the CBN simply tinkered with the loan to deposit ratio for banks by moving it up. It also restricted some active players from participating in the debt market (treasury bills and bonds).
As a result, the last treasury bill auction by CBN attracted only 5.1% as against an average of 13% last year.

Advantages:
-Lower deposit rates should usher in lower lending rates from banks to manufacturers etc, which is the primary desire of the government.
-The stock market which has been in the doldrums for upwards of three years has witnessed a positive resurgence due to the inverse relationship that exists between low-interest rate and capital market. When the interest rates on deposits become unattractive, investors are then willing to take on the extra risk of putting money in the stock market for better yield.

Disadvantages:
-There is significant value erosion in putting money in the banks since the interest rate offered currently is less than the inflation rate which stands at about 12%.
- The exchange rate may come under pressure as a result of investors moving there deposited funds out of banks to buy FX.
-Foreign portfolio investment (FPI), especially in our debt market, will decrease because foreign investors will find low-interest rates unattractive for arbitrage. This will consequently decrease FX inflows into the economy.
- The bank's profit earnings in 2020 may take a significant haircut because of lower margins and depositors fleeing to other investment destinations.

Take Away:
-There is a positive confluence of opinion on CBN’s move at this time stemming from the general outcry by manufacturers and others whose businesses have
been stifled by high-interest rates.

-The CBN will continue to hope that crude oil prices remain stable or higher, else, defending the currency may become a challenge.

Finally, by playing around with the macroeconomic variables, the CBN seems to have succeeded for now in lowering the interest rate. If sustained, this can have a positive impact on the GDP growth and also bring back life into the economic value chain.

Time will tell........