U.S. cuts interest rates to 4.75 per cent
By Ade Ogidan, Enitar Ugwu, Gbenga Agbana and Bukky Olajide
SHOVING its much-vaunted philosophy of market determinism aside, the United States (U.S.) government has made a dramatic intervention in lending rates by its banks.
The U.S. Federal Reserve (Fed), the equivalent of the Central Bank of Nigeria (CBN), yesterday slashed lending rates from 5.25 per cent to 4.75 per cent.
In Nigeria, the rates have officially hovered between 18 per cent and 21 per cent. But in reality, they are between 25 and 28 per cent.
Until February this year, it was 0.25 per cent and has remained 0.05 per cent for seven months in Japan, perhaps, the most productive nation in the world.
Lending rates are a key factor for business to thrive, especially in the real sector and the housing industry.
Until June 2004, lending rates in the U.S. were 1.0 per cent. From then till mid-2006, the rates were increased 17 times to arrive at 5.25 per cent.
The rate in Norway is 4.25 per cent and 2.5 per cent in Germany. It is 5.75 per cent in Britain, 12.5 per cent in Ghana and 11.5 per cent in South Africa.
The U.S. action has triggered ripple effects on economies around the world, having positive impacts on major global stocks, with shares shooting up to record high.
However, the rising profile of share prices eluded Nigerian stocks, as the All-Share Index and market capitalisation of the Nigerian Stock Exchange (NSE) dropped further.
Also, despite indication that other central banks, including Bank of England, would toe the Fed's line, interest rates in Nigeria may continue to assume their business-unfriendly high profile. There were no hints from the CBN yesterday that similar intervention would be effected on local rates.
The move by Federal Reserve, the first U.S. rate cut in four years, is aimed at restoring confidence in the housing market and preventing the turmoil from denting the economy.
The Fed move could help prevent the U.S. economy, which is already slowing down, from sliding into a recession, which could hurt economic growth prospects around the world.
And at close of trading yesterday, the Dow Jones industrial average was up 2.51 per cent at 13,739.39, the S&P 500 Index was up 2.92 per cent at 1,519.78, and the Nasdaq was up 2.71 per cent at 2,651.66.
It was the S&P 500's biggest percentage gain since March 2003, and Dow average's best one-day percentage gain since 2003.
By making money cheaper to borrow, the U.S. Central Bank is hoping that people will spend and invest more, revitalising the economy,
But the Fed faces a dilemma, with some commentators worried that too-big rate cuts could stoke up inflation.
A reduction in rates by 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, Associated Press (AP) quoted some unnamed sources.
But in a statement, the Fed said that they needed to act before the credit crunch caused more damage to the economy.
It said that "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally".
The size of the cut - the first time that the rate has changed in more than a year - took many analysts by surprise.
William Sullivan, chief economist at JVB Financial Group in Florida said: "It's difficult to interpret what the ultimate ramifications will be.
"The Fed's rate cut could suggest that the stresses in the credit markets are larger than what people thought and that the Fed thought an aggressive move was needed now."
And Tim Evans, an energy analyst at Citigroup Futures in New York, said: "This confirms that the U.S. economy is fragile and attempts to avoid a full recession by cutting interest rates may or may not be successful, but this shows that the Fed is taking the possibility of a recession seriously."
But there was better news for those concerned about inflation with the Producer Prices Index (PPI) for August showing a bigger than expected fall.
The U.S. Bureau of Labour Statistics said that the measure of the prices paid to producers of goods and services in the U.S. fell by 1.4 per cent, which was the biggest fall since October 2006.
"The August PPI was good news," said Gary Thayer, chief economist at AG Edwards and Sons in St. Louis.
"There was a decline in energy prices that helped pull the overall index down and core inflation looks relatively modest," he added.
Indeed, interest rates in Nigeria differ from bank to bank.
As at last year, banks' interest rates were determined by the Minimum Discount Rate (MRR) decided by the CBN.
The MRR is the anchor rate from which lending and deposit rates are determined. It also defines the lower and upper limits of market rate.
In Nigeria during the MRR regime, the CBN mandated that banks' interest rates should not be more than four per cent above the MRR.
Prior to its abolition by the CBN late last year, the MRR was 13 per cent.
However, with the introduction of Monetary Policy Rate (MRR) to replace the MRR, the interest rates are now market-determined.
That explains the disparity in rates as charged by banks.
Harrison Owoh, Managing Director H. J. Trust and Investment Limited (Bureau de change, Lagos), commended the U.S. action to Nigeria.
He said: "The Federal Reserve Bank of the United States of America brought down the interest rates to draw the investors so as to make people borrow money, because the more money they borrow, the more they invest and the more the economy moves forward."
Owoh continued: "You will notice that any country that has less interest rates will always have a sound economy, this is because it also helps the infrastructure needed for a sound economy to grow."
He noted the U. S action is to bring down interest rate to be competitive in the global market. "For instance, Germany's interest rate is 2.5 per cent, so America wants to be competitive in the global economy," he said.
Owoh added: "Moreso, lower interest rates may want to translate to lower inflation rates as it could help in bringing down inflation rate.
"Look at Nigeria now, our interest rate is 18 per cent and 21 per cent plus charges. If you borrow at 21 per cent, what can you do with it? This is why the economy is not growing."
On the NSE, the All-Share Index, which measures the movement in share prices of quoted stocks fell from 51,547.81 point to 51,525.70 yesterday, while market capitalisation fell from N8.117 trillion to N8.071 trillion, indicating that the bears held sway.
To market operators who spoke with The Guardian, the development does not have any correlation with the Nigerian stock market because the market is not opened up yet.
According to them, Nigeria is operating from a jurisdiction that is different from that of the European markets.
However, they noted that if U.S. investors decide to borrow cheap funds from their country to invest in the Nigerian stocks market, they will likely get better returns, which would boost the local market by enhancing its depth.
For instance, the president of the Chartered Institute of Stockbrokers (CIS), Mr. Dipo Aina, said: "We are two different jurisdictions so their own market cannot affect ours.
"If the investors in the United States want to invest here, there is the tendency that they will get cheaper funds relatively, to invest here. The effect is basically that they will have high returns and that will deepen the depth of the market and renew confidence in the local market. Our stocks will be more attractive because of high returns."
The Managing Director of Goldman Assets, Mr. Olu Abayomi Sanya, corroborated the views of Aina.
His words: "Our market is not really integrated with the international market. People there will have cheaper funds to borrow in the market on Eurobonds. It will have positive effects."
Henry Olayemi, immediate past president of CIS also said there is no correlation between the U.S. market and Nigeria.
"There is no correlation. Our market is not opened up yet. The stocks here are only traded and rated here. It does not affect our market here."