A Lagos based investment advisory firm, Financial Derivatives Company (FDC) Limited has said that as long as savings and deposit interest rates remain 11 per cent below the rate of inflation, mobilization of savings for investment purposes will remain a mirage.
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).
Capital formation is used in economic theory, as a modern general term for capital accumulation, referring to the total “stock of capital” that has been formed, or to the growth of this total capital stock.
It refers to additions of capital goods, such as equipment, tools, transportation assets, and electricity.
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.
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 (Q4).
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.
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