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Cablegate: Nigeria: Central Bank Increases Monetary Policy Rate

VZCZCXRO8822
PP RUEHMA RUEHPA
DE RUEHUJA #1014 1541324
ZNR UUUUU ZZH
P 021324Z JUN 08
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 2991
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 9338
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS ABUJA 001014

SIPDIS

DEPARTMENT PASS TO USTR AGAMA
TREASURY FOR PETERS, RHALL
DOC FOR 3317/ITA/OA/KBURRESS
DOC FOR 3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV PGOV NI
SUBJECT: NIGERIA: CENTRAL BANK INCREASES MONETARY POLICY RATE

REF: A. 07 ABUJA 2417

B. 07 ABUJA 2227
C. 07 ABUJA 1793

1. SUMMARY: The Central Bank of Nigeria (CBN) has raised its
Monetary Policy Rate (MPR) from 9.5% to 10% in April. This is the
second increase in four months. A higher MPR increases the cost of
borrowing and should encourage savings, but has not. The Nigerian
interest deposit savings rate has decreased from 3.77% in July 2007
to 2.86% in February 2008. In March 2008, the average interest
savings rate was 2.92% and yet average lending rate was 16.20%
leading to an unhealthy gap between savings deposit and lending
rates. END OF SUMMARY

2. On April 1, 2008, the Central Bank of Nigeria (CBN) raised the
Monetary Policy Rate (MPR) by 50 basis points, from 9.5% to 10 %,
citing recent GON fiscal activities. It is the second increase in
four months. The MPR is the interest rate at which the CBN lends
money to the commercial banks, and according to the CBN, their goal
with the MPR is to adjust short-term interest rates to maintain a
stable national currency, low inflation, and economic growth.

3. In June 2007 when the MPR was reduced by 200 basis points,
commercial banks prime lending rate fell only by 48 basis points
from 16.94% to 16.46% and rate on customer deposits fell by 77 basis
points from 3.82% to 3.05%. Between July 2007 and March 2008, the
MPR rose by 150 basis points, but the commercial banks' savings and
time deposit rates declined steadily from 3.77% to 2.86%.

4. COMMENT: Clearly, interest rates by commercial banks in Nigeria
do not react proportionately to adjustments in the MPR. So far the
increases in the MPR have led only to increasing borrowing costs to
contain inflation, but failed to encourage savings. A higher MPR
limits lending credit for increasing production capacity, employment
generation, and hinders business cost competitiveness. In March
2008, the average interest savings rate was 2.92% and yet average
lending rate was 16.20% leading to an unhealthy gap between savings
deposit and lending rates. END COMMENT.

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