Benchmark Lending Rates Affect Us All

Reuters announced a short time ago that the Nigeria’s central bank unexpectedly put up its benchmark lending rate by 25 basis points on Tuesday. This caught most of the analysts off guard as Nigeria directed its focus from maximizing growth to battling inflation.

Central bank governor Lamido Sanusi has tended to put economic progress in Africa’s most important oil supplier ahead of preserving a lid on selling price increases, notably just after a near failure of the financial system last year.

But nevertheless, Sanusi said reforms created since he bailed out nine banking companies a year ago meant there was now margin for monetary tightening up, 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 and content that an adequate amount of improvement has been made in banking sector reforms to offset the financial risk of monetary tightening to financial institutions,” he shared with 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 below the benchmark from 5 percent up to now.

Experts said the two moves — pretty much a raising of official deposit and lending rates to 3.25 and 8.25 percent respectively — proved resolve 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.

A most important cause for worry to the man in the street is that funding might become more tricky to raise and more expensive to borrow. This places pressure on the banks to expand their lending criteria and primarily makes things more expensive to make and sell. Prices go upward in the short term and so do interest rates. So home mortgages and car loans will become more expensive and disposable income shrinks. – So spend more conservatively and be careful about new debt.

Having said that the Federal Bank reaffirmed that it would certainly hold the benchmark lending rate in a spectrum of zero to 0.25 percent “for an extended timeframe.”