In a recently released circular, the CBN reviewed the minimum interest rate payable to savings deposits to 4.2% (previously 0.15%)- 30.0% of the MPR. This decision followed after the CBN adopted an aggressive hawkish stance by hiking rates by 250bps in its last two meetings. With headline inflation for Jul-22 printing at 19.6%, representing its highest level since Jan-17, the CBN has adopted an additional measure to dampen the money supply and incentivise savings.

Economic theory posits a strong correlation between savings and economic growth. This is because savings stimulate investment by increasing in-country capital, creating greater opportunities for internal production and economic growth, which could lead to this output/ income being more taxable.

Other downside risks include concerns about the effectiveness of this policy and its effect on demand which could further shrink circulation and dampen unemployment in an already fragile economy.

Overall, we consider that there will be potential net gains in the long term; firstly, the banking sector can capitalise on this through the multiplier effect. Secondly, the economy as the growth rate of savings leads to more sustainable economic development. However, in the short-term, listed banking stocks may see Net Interest Margin weaken in Q3-2022 q/q against Q2-2022, following the uptick in funding cost.