Just what Could be the impact on benchmark lending rates moving upwards
Friday, September 24th, 2010Benchmark Lending Rates Increase
Reuters announced recently that the Nigeria’s central bank suddenly increased its benchmark lending rate by 25 basis points on Tuesday. This caught the analysts off guard as Nigeria changed its attention from enhancing growth to battling inflation.
Central bank governor Lamido Sanusi has tended to place economic development in Africa’s leading oil supplier ahead of maintaining a lid on selling price increases, particularly after a near collapse of the banking system last year.
Notwithstanding, Sanusi said reforms created since he bailed out nine financial institutions a year ago meant there was now margin for monetary tightening, raising the benchmark lending interest rate to 6.25 percent from 6.0 percent in the first hike in more than a year.
“The committee is satisfied that ample improvement has been made in banking sector reforms to mitigate the threat of monetary tightening to financial institutions,” he notified a news conference in the capital, Abuja.
He also narrowed the interest rate lending and deposit corridor for commercial banks that sits either side of the bank’s benchmark level by lifting the deposit rate to 3 percent lower than the benchmark from 5 percent up until now.
Experts said the two moves — effectively a raising of official deposit and lending rates to 3.25 and 8.25 percent respectively — exhibited determination to tame rising prices that quickened to 13.7 percent year-on-year in August from 13.0 percent the previous month.
This comes after the State Bank Of India increased their benchmark lending rates by 0.5% in August and Canada increased their benchmark lending rates in June – both seemingly bothered about inflation on the back of strong growth.
Often the major cause for worry to the man in the street is that capital is likely to become more challenging to raise and more costly to borrow. This places pressure on the banks to expand their lending standards and in reality makes things even more costly to produce and market. Price levels go up in the short term and so do interest rates. So home loans and car loans get more expensive and disposable income shrinks. – So spend more conservatively and be careful about new debt.
At the same time the Federal Bank reaffirmed that it is going to hold the benchmark lending rate in a spectrum of zero to 0.25 percent “for an prolonged timeframe.”
