Cbn interbank rate rises cash shortage

A very timely and relevant topic!

The CBN Interbank Rate, also known as the Overnight Policy Rate (OPR), is the rate at which commercial banks lend and borrow money from each other overnight. The Central Bank of Nigeria (CBN) sets this rate to influence the overall direction of interest rates in the economy.

Recently, the CBN Interbank Rate has risen, which has led to a cash shortage in the economy. Here's a breakdown of the situation:

Why did the CBN Interbank Rate rise?

The CBN Interbank Rate rose due to several factors, including:

  1. Inflation concerns: The CBN is concerned about rising inflation, which has been driven by factors such as a surge in food prices, a weak naira, and a rise in global commodity prices. To combat inflation, the CBN has increased the OPR to reduce the money supply and curb demand pressures.
  2. Fiscal policy: The CBN has also been influenced by the government's fiscal policy, which has led to an increase in borrowing from the CBN. This has put pressure on the CBN's foreign exchange reserves and led to a rise in the OPR.
  3. Global economic uncertainty: The global economic uncertainty, particularly the COVID-19 pandemic, has led to a rise in risk aversion, which has increased the demand for safe-haven assets like government securities. This has pushed up yields and led to a rise in the OPR.

What are the implications of a rising CBN Interbank Rate?

A rising CBN Interbank Rate has several implications for the economy, including:

  1. Cash shortage: As the OPR rises, commercial banks become more cautious and reduce their lending to each other, leading to a cash shortage in the economy. This can lead to a reduction in economic activity, as businesses and individuals may struggle to access credit.
  2. Higher borrowing costs: A rising OPR means that commercial banks will increase their lending rates, making it more expensive for businesses and individuals to borrow money. This can lead to a reduction in consumption and investment.
  3. Weaker naira: A rising OPR can lead to a weaker naira, as foreign investors may become more cautious and reduce their investments in Nigeria.
  4. Inflationary pressures: A rising OPR can lead to higher borrowing costs, which can increase inflationary pressures in the economy.

What can be done to address the cash shortage?

To address the cash shortage, the CBN and commercial banks can consider the following measures:

  1. Increase liquidity: The CBN can increase liquidity in the system by injecting more cash into the economy through open market operations.
  2. Reduce OPR: The CBN can reduce the OPR to make borrowing cheaper and encourage commercial banks to lend more.
  3. Improve monetary policy communication: The CBN can improve its communication with the public and commercial banks to reduce uncertainty and volatility in the economy.
  4. Strengthen the financial system: The CBN can strengthen the financial system by improving the regulatory framework, enhancing risk management practices, and promoting financial inclusion.

In conclusion, the rise in the CBN Interbank Rate has led to a cash shortage in the economy, which can have far-reaching implications for economic activity, borrowing costs, and inflation. To address this issue, the CBN and commercial banks must work together to increase liquidity, reduce borrowing costs, and promote financial stability.