Tony Chukwunyem 
Analysts at the research department of Coronation Merchant Bank have attributed the recent increase in interest rates on savings accounts as well as Treasury bill (T-bill) rates to the reduced liquidity in the banking system, which was occasioned by deposit money banks’ (DMBs) compliance with the Supreme Court’s ruling that the old N200, N500 and N1,000 banknotes remain legal tender till December 31 this year. The analysts, who stated this in a new report, released last week, however, noted that while current savings rates “are far better than what has been available for many months,” they are still “far short of the rate of inflation at 21.91 per cent year-on-year.” The report partly read: “This year market interest rates have been volatile, and at the moment savers have much better opportunities than they syshad at the beginning of the year.
“The explanation for these big swings in rates lies in the banknote replacement policy of the Central Bank of Nigeria (CBN), in our view, and the overruling of that policy by the Supreme Court in March. “The CBN’s policy to withdraw old naira bank notes and reissue new ones had one clear characteristic, namely lack of new banknotes. This meant long queues at ATMs, and an observable strain on the inter-bank payment system as cashless customers attempted to transact with each other (clearly, the infrastructure cannot cope with the cashless society just yet). “The other, slightly less obvious, effect was that commercial banks were suddenly liquid with their customers’ cash. When they bid at T-bill auctions they had plenty of money to spend. “This depressed rates all the way from January through to mid-March, with the 1-year T-bill rating trending as low at 3.78 per cent.
Next, and following the ruling of the Supreme Court, the CBN instructed banks to issue old notes again. This reversed the trend in their liquidity and, with less money to spend at T-bill and FGN bond actions, short-term rates moved sharply upwards again. This was also reflected in the indicative rates offered by banks to financial institutions for 90-day deposits.” According to the analysts, however, it might be too early to conclude that current savings rates are so exceptionally good that savers need to take advantage of them now, given the continuing uncertainty over whether or not, the CBN is releasing all the old banknotes back into the system.
They said: “It is difficult to say, because we do not know the extent to which old banknotes have been reissued and the extent to which further reissues of banknotes are set to create illiquid conditions at banks, which could force rates upwards again. What is certain is that these rates are far better than what has been available for many months, although far short of the rate of inflation at 21.91 per cent
