Why Nigeria's Cbank lower interest rate - bankers

The central bank of Nigeria (CBN) on Tuesday lowered its benchmark interest rare to 11 percent from from 13 percent, the first of such in six years, bankers said the decision to cut rate was already anticipated in view of prevailing market condition, but were surprised by the 200 basis points slashed.

Emefiele, CBN boss 

Interbank interest rate has eased to a new low of one percent for overnight lending due to the injection of liquidity into the banking system in the wake of early cut in cash reserves requirements (CRR) by the central bank at its September monetary policy  committee (MPC) meeting.
However, bankers said the cut in the central bank benchmark interest rate was informed by arbitraging going on in the market due to the disparity between the previous benchmark rate and interbank market rate.
Some banks have been taking funds at one percent at the interbank market and place same with the central bank at 11 percent, taking advantage of the wide margins between the benchmark rate and prevailing market rate.
The central bank also announced a changed in the corridor around its benchmark interest rate from hitherto +/-200 basis point to +200 basis points above and -700 basis point below the new rate.
"The central bank changed the corridor around the benchmark interest rate as a result of the activities of some banks that have been arbitraging on the central bank. Some banks will borrow at 1 percent at the interbank and lend to the central bank at 11 percent, making a kill," a money market dealer told our reporter on Tuesday.
The implication of the new rule is that the central bank can only take funds from banks at 4 percent and lend to them at 13 percent.
The central bank Governor, Godwin Emefiele also confirmed the arbitraging going in in the market at the briefing on Tuesday.
Emefiele said fresh liquidity from the cash reserve rate cut would only go to banks that were ready to channel it into "employment generating activities" such as infrastructure projects, the agricultural and minerals sectors.
He rapped those banks which had used a cut in the cash reserve ration in September to invest in bonds rather than lend to households and businesses.

According to Emefiele, "Unfortunately what we have found out is that rather than banks redeploying that liquidity... what the banks do is just dump their money on CBN (the central bank) and earn 11 percent - and I use the words - for doing nothing," Emefiele said.