FDC says new policy reducing interest on savings account will hamper savings for investment

Financial Derivatives Company (FDC) Limited, a Lagos based investment advisory firm, has said that mobilization of savings for investment purposes will remain a mirage as long as savings and deposit interest rates remain 11 per cent below the inflation rate.

The firm in its latest executive breakfast session presentation stated that the investment multiplier required to boost output is a function of the level of gross capital formation which is currently at N37.02 trillion ($120.8 billion).

According to FDC, the recent reduction in interest rate by the CBN has positive impact on the banking sector, because lower savings interest rate will boost banks earnings in 2020, most especially in the fourth quarter.

The firm further observed that savings penetration and growth is still low in Nigeria, adding that minimum interest rate is another form of price control.

It stated that banks like Zenith and Guaranty Trust with relatively higher funding costs and high savings mix (Zenith 23.65 per cent; GTB 27.26 per cent) will benefit more.

Banking equities could be a net beneficiary given scope for continued dividend payments.

On the negative side, FDC stated that lower interest rates at a time of rising inflation will further widen the negative real rate of return on investment and could increase the marginal propensity to consume (MPC), thereby stoking inflationary pressures.

It warns that Naira weakness as an aftermath of this will increase capital flight out of Nigeria.