Opinion: The Central Bank’s Benchmark Rate and the Rest of the Economy, By Uddin Ifeanyi
The decision, last week, by the Central Bank of Nigeria’s policy committee to trim its benchmark interest rate by 100 basis points to 12.5 per cent has been much commented upon, including by those who think the economy may benefit from lower rates.
For years now, it has had no influence on headline inflation. Nor on the domestic cost of money. Consequently, much of the dialogue around the implications of the rate reduction on economic outcomes is so much expenditure of hot air. Much, but not all of it. For there is a part of the CBN’s recent grab-bag of initiatives in aid of economic growth that helps make sense of the reduction.
Aeons ago when the central bank understood the relationship between domestic savings and investment and saw how positive real returns on retail deposits could drive its financial inclusion strategy, it had pegged savings rate at 30 per cent of the MPR. With the MPR at 13.5 per cent, it didn’t take depositors long to figure that money in a savings account was the next best thing since the rice intervention policies.
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