₦airaland Forum

stevecantrell:
Beats me.
I think its an attempt to take money out of circulation and lower the inflation rate which is over 12%.
Its time to go back to treasury bills, I believe they're not taxed.

Well bro, fixed deposit rates should improve with this news because banks if bank is attempting to take money out of circulation, it'll do that by enciting people to save & invest. Hence slightly increasing their rate. T.bills would also improve when our budget will be passed. So keep yur ears on ground!

mark3009:
Abi o my brother. When was there ever a drastic increase in money supply? Salaries which is a major source of money supply into the economy has remained stagnant for many years now so what do they mean by excess liquidity?

Lol...Wateva statistics Emefiele, is using, I jus can't wait to get der n see for myself

gradeA:
Nice analysis, however you can never take away the major cause of inflation which is more money chasing fewer goods.

The previous rates discouraged people investing in banks. With fixed deposits at 2.5 percent and treasury bills for about 180 days at about 6percent as against the 15percent of early last year, people were no longer keen on fixing in banks or lending to government through tbills. This led to Nigerians leaving easy money in accounts which they could readily have access to.

The singular reason for this improved rates is to enable government (through the financial sector) mop up more cash from the economy. The rates make it more attractive to invest more in banks, creating greater liabilities for the banks.

Notice the liquidity ratio was not touched. Liquidity seeks to measure the level of ready cash at a bank's disposal. This was deliberate to still give banks enough threshold to mobilize more cash without being in danger.

This policy is just a ploy to reduce the amount of money in your hands, but the question is;

Would it work?

Nice one der bro, bt bobo e no work, we're s d money in d 1st place. Why was d interest rate on treasury bills brought down to 6% Frm 15%

macherie1:
Nigeria is definitely in for serious trouble. If the Apex bank is unable to figure out what the problem with the economy is then there is cause for alarm. Surplus money chasing too few goods is Demand-pull inflation which is obviously not what Nigeria is experiencing. What we are experiencing is a cost-push inflation caused by shocks in the economy such as a sudden and sharp decrease in the price of crude oil which accounts for a huge proportion of government revenue. This situation led to devaluation of the Naira since the the government had to raise the exchange rate to realize more Naira from the dwindling revenue from oil export. The spiral effect of the increase in exchange is that manufacturers, importers now need to pay more Naira to buy dollars in order to fulfil their obligation to their foreign suppliers. Subsequently, these manufacturers pass the cost to the consumers and inflations escalates.

CBN's decision to increase the interest rate can be compared to having a noose around one's neck being pulled on both sides by strong forces. Manufacturers who are already crumbling under the weight of high cost of on raw materials (most manufacturers depend heavily on importation of raw materials)due to the ridiculously high exchange rate now have to face another challenge of paying more interest on loans. The implication is that production for most companies will either reduce or come to a halt. Supply decreases and the price of commodities will increase. Inflation digits will double.

What CBN should be doing is pursue policies that will boost production and promote exports. US experienced severe depression in the early 1930s. The depression was fuelled by the Fed's decision to cut money supply to the economy. The depression was so severe that it spread to other countries of the world. Most people were out of Jobs and a lot committed suicide. Surely CBN Governor and his directors forgot to learn from history while in school.

South Korea was once one of the poorest countries in the World with a Per capita income below $100.South Korea under President Park Chung-hee launched economic and social development plans, and soon the economy began to grow. Today, South Korea in one of the world leaders in exportation of several commodities ranging from auto-mobiles to different types of electronics. So also countries like Argentina and Japan.

CBN should take a cue from this and stop making decisions that will expedite the failure of the economy. The video below is one that the CBN Governor and president Buhari his boss should watch.


https://www.youtube.com/watch?v=1KDf6lUFWcc

I must admit that I agree with you a 100percent. This inflation is as a result of an increase in cost of production, and not excess cash pursuing fewer goods. The regulators of the economy should get their acts together as to the causes and effects rather than trying to use a gun to kill a mosquito.

demzey:
Nice one der bro, bt bobo e no work, we're s d money in d 1st place. Why was d interest rate on treasury bills brought down to 6% Frm 15%

Point noted. This inflation is due to an increase in cost of production and not excess cash pursuing fewer goods.

As for the drop in tbills, I would personally associate it to the effect of TSA. The government has realised substantial funds and don't need your chicken change anymore hence the lowering rates

Chukzyfcb:
The economy growth is going down, yet Inflation is rising. Despite the cbn's stunt in the past of reducing the CRR & MPR, so banks will be able to stimulate the economy by giving our loans @ a lower rate, it didn't work! So what we have is STAG-FLATION.....CBN had to pick their battle, they either fight inflation or improve growth...at the moment, fighting Inflation seems to be what's on their agenda based on this news #Not an economist by the way

Then I think they made the wrong choice. When you have to choose between inflation and avoiding a recession, you should avoid the recession. Inflation is when your salary can't buy what it used to buy. Recession is when you have no job, and your wife has no job, and your parents have no job, and everyone is broke and businesses are winding down and sacking people. Inflation is a mild annoyance compared to a recession.

Seun:
Then I think they made the wrong choice. When you have to choose between inflation and avoiding a recession, you should avoid the recession. Inflation is when your salary can't buy what it used to buy. Recession is when you have no job, and your wife has no job, and your parents have no job, and everyone is broke and businesses are winding down and sacking people. Inflation is a mild annoyance compared to a recession.

Well spoken mr seun, but we are not yet in a recession. Our economy according to the last quarter of 2015 grows @ 2.8%. So although growth has reduced, one thing is significant. The economy is still growing @ merely 2.8%. Inother words, our economy IS STILL GROWING but @ 2.8%...... So maybe until we hit recession, then cbn will opt to tackle recession than inflation. We haven't hit recession tho

herbie27:
I can only talk of two things here.
The interest rate and the reserve ratio.

These are measures the central bank uses to control the commercial banks when their is inflation.

The interest rate.... the central bank discount bills to the commercial banks and wen these bills are discounted at higher interest rates it forces the commercial banks to increase the interest rate on loans and when dis is done, people and organisations will be discouraged frm borrowing money from banks. So dis leads to a reduction in the amount of money in circulation because inflation is caused when there is excess money in circulation.

The reserve ratio...since the central bank increased it reserve ratio frm 20% to 22.5% the lending power of the commercial banks will also reduce because they've been asked to keep a greater proportion of their money with the central bank and wen they do, they will be left wit less money and dis is done to reduce the lending power of the commercial banks which will reduce the volume of money in circulation too.

these measures as stated by the CBN is to reduce inflation...which is what we need right now cos their is too much money in circulation that buys only fewer goods.

Is a welcome development.

No, It is not 'too much money in circulation' causing the inflation now; the inflation is caused by weak Naira because of imported goods.

So, the CBN wants to stregthen the Naira by ensuring the bond yield goes up so that foreign investors can troop in. You know investors keep their monies where they get hogh returns.

Also, local banks will be encouraged to patronise gilt-edged securities because of increased interest rate; so, banks will rather keep their money with the CBN for a riskless return of 12% than lending to customers that may not pay back which results in non-performing loan that must be written off in 365 days.

@macherie1
Since the inflation we are experiencing now is import- pushed as a result of weak Naira, the rate hike would jack up bond yield and demand for the bond rises from international investors.

What do int'l investors use to buy our bonds? foreign currencies of course - dollars, pounds, euro etc

walexy30:
No, It is not 'too much money in circulation' causing the inflation now; the inflation is caused by weak Naira because of imported goods.

So, the CBN wants to stregthen the Naira by ensuring the bond yield goes up so that foreign investors can troop in. You know investors keep their monies where they get hogh returns.

Also, local banks will be encouraged to patronise gilt-edged securities because of increased interest rate; so, banks will rather keep their money with the CBN for a riskless return of 12% than lending to customers that may not pay back which results in non-performing loan that must be written off in 365 days.

my dear!, the only thing that causes inflation is when there is too much currency in circulation and these measures taken by the CBN are only measures to reduce the volume of money in circulation.

Chukzyfcb:
Well spoken mr seun, but we are not yet in a recession. Our economy according to the last quarter of 2015 grows @ 2.8%. So although growth has reduced, one thing is significant. The economy is still growing @ merely 2.8%. Inother words, our economy IS STILL GROWING but @ 2.8%...... So maybe until we hit recession, then cbn will opt to tackle recession than inflation. We haven't hit recession tho

The 2015 data you cited doesn't prove that were not in a recession at this present time. First of all, it's three months old. Secondly, I think what you said is based on year on year growth figures which are a lagging indicator. By the time that clearly shows that we are in a recession, we would have already lost a lot of businesses and jobs and even if corrective measures are taken at that point it would be a long time before the economy recovers from the damage. When it comes to recession, prevention is far better than correction.

Seun:
The 2015 data you cited doesn't prove that were not in a recession at this present time. First of all, it's three months old. Secondly, I think what you said is based on year on year growth figures which are a lagging indicator. By the time that clearly shows that we are in a recession, we would have already lost a lot of businesses and jobs and even if corrective measures are taken at that point it would be a long time before the economy recovers from the damage. When it comes to recession, prevention is far better than correction.

Signs of recession; Job loss,low purchasing power,inflation

walexy30:
@macherie1
Since the inflation we are experiencing now is import- pushed as a result of weak Naira, the rate hike would jack up bond yield and demand for the bond rises from international investors.

What do international investors use to buy our bonds? foreign currencies of course - dollars, pounds, euro etc

When it comes to investing, investors consider more than interest rate. They consider the risk, economic stability and several other factors. Would you as an international investor invest in an economy with an unstable exchange rate, political, fuel and power generation crisis? Increase in interest rate will only frustrate local industries. The only way out of this mess is to boost local production and export. That can't be achieved by increasing interest rate.

When you talk about money supply, you should look at the monetary standards....