The central bank expects the economy to grow between 6.5% and 7.5% this year, a sharp revision to April’s forecast of between 4.3% and 5.8%. The economy is expected to retain the growth momentum during next year on the back of sound domestic economic fundamentals, bright prospects of a continued global recovery and improvements in consumer and investor sentiments.

Releasing the central bank’s latest inflation report, deputy governor Paiboon Kittisrikangwan said growth is seen in the range of 3%-5% for next year, unchanged from the projection in April. Going forward, the Thai economy would be driven by private domestic demand and the export sector, the official said.

However, the bank expects the growth momentum to moderate in the second half of this year compared to the first half due to persisting internal political tensions and softened global growth due to sovereign debt concerns. In the first quarter, the Thai economy grew 12% annually, its fastest pace in 15 years, led by strong exports.

Thailand’s economy is likely to grow more than initially expected, the International Monetary Fund said last week. The Washington-based lender said it foresees Thailand’s real gross domestic product rising 7%-8% in 2010, up from its previous projection of 7%. Thereafter, the Thai growth may come down to 4% next year, the IMF said. That was a downward revision from 4.5% growth projected in July.

The central bank revised down its inflation forecasts, citing subsiding oil and commodity prices, readiness of businesses to maintain prices at the prevailing levels until the end of the third quarter and the government’s extension of some cost-of-living reduction measures to the end of the year. The bank now sees inflation within the range of 2.5%-3.8% this year, down from the previous forecast of 3.3%-4.8%.

Meanwhile, the bank slightly revised up the inflation forecast for next year, citing increasing demand pressures and narrowing output gap. In 2011, inflation would be between 2.5%-4.5%, it said, compared to 2.3%-4.3% previously forecast.

The bank’s monetary policy committee assessed that uncertainties surrounding the growth projection were lower than that in the previous April report, with downside and upside risks becoming more balanced, the report said. This was mainly due to diminished domestic downside risks, as political tensions have abated to some degree. On the other hand, the global growth prospect will remain a major risk factor on the external front, the bank noted.

Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System, told congressional leaders in a letter yesterday that the Fed will seek to renegotiate mortgages it owns that might otherwise enter foreclosure.

It is unclear how many homeowners stand to benefit. Under the program, the Fed can reduce what a homeowner owes on a mortgage, lower the interest rate, lengthen the term of a loan or take other steps to keep a loan from defaulting, if doing so would offer taxpayers a better long-term payoff than foreclosure.

The interesting thing is that this has been going on now for almost a year through reputable loan modification companies.

Scott Jenkins, a homeowner in Irvine CA, worked with Mortgage Modification Legal Network located in California and says. I felt like my mortgage company was giving me the run around and I needed help now. I contacted the Mortgage Modification Legal Network and my mortgage modification was done in 10 days. I truly believe that waiting on the government or federal programs would of landed me in a shelter or even worse.

This latest attempt to help homeowners should be taken with caution. The new policy applies only to mortgages the Fed controls through three companies formed to hold mortgage-related assets it acquired last year from the collapse of investment house Bear Stearns and insurer AIG. Those three companies hold roughly $74 billion in assets. That is only a fraction of the total troubled mortgages and mortgage-backed securities

As in the past government announcements seem to be the lifeline homeowners need to rescue them from foreclosure. Then you look at the fine print. Individual borrowers are unlikely to know whether their mortgages are owned by the Fed, but if they qualify for Loan Modification, they would deal only with their mortgage servicing company.

Trying to figure out if you mortgage is owned by the Fed is more than likely going to be a timely task, something homeowners facing foreclosure can not afford. A loan modification can stop foreclosure and is usually the best option for homeowners. It is recommended that you contact a loan modification attorney for assistance.

The Federal Reserve also announced it will use new tools to stimulate the economy and curb foreclosures. The Federal Reserve on Wednesday kept its benchmark lending rate near zero and said it’s likely to stay that way for some time, while also signaling new efforts to lower home mortgage rates.

The Fed left its target for the fed funds rate unchanged at a range of zero to a quarter-point. This ensures that most consumer lending rates will remain unchanged, too. The Fed promised new steps to boost lending to consumers. It also suggested that it would soon purchase Treasury bonds to decrease other lending rates notably, home mortgage rates and long-term corporate loans.

The Fed has also accepted collateral spurned by private lenders, expanded the kinds of institutions that can borrow from the Fed and extended repayment periods.

All this being said the probability of this having a big impact on the economy and foreclosures is low. A report on Friday is expected to show the economy contracted at a 5.4 percent annual rate in the final three months of last year, which would be the steepest falloff in activity for any quarter since 1982.

Testifying before the Senate Banking Committee, Bernanke acknowledged that European debt problems are slowing U.S. growth, as is the protracted slump in the U.S. housing sector. He said mounting federal budget deficits must be addressed, but added that government spending is warranted given the lack of private-sector demand for goods and services.

Bernanke shot down suggestions that his Fed is out of bullets should the economy slide back toward contraction.

“If the recovery seems to be faltering, then we at least need to review our options. We need to think about possibilities. But, broadly speaking, there are a number of things we could consider” he said.

The Fed’s benchmark interest rates, a main lever of the central bank to spur economic activity, have been near zero for the past two years. That’s led some economists to worry that the Fed is running out of options to spark a slumping economy.

Bernanke countered that there are a number of unconventional steps the Fed still could take to stimulate the economy, ranging from resuming purchases of mortgages to reinvesting in securities to issuing a statement that interest rates will remain at zero for a fixed period to provide certainty to investors.

“We have not come to the point where we can tell you precisely what the leading options are” he said, adding that “policy is already quite stimulative. I think we still do have options, but they are not going to be the conventional options.”

Bernanke was blunt about the challenges, and he acknowledged that some government stimulus that powered the expansion in the first half of 2010 is likely to fade.

“Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth” Bernanke said in opening remarks.

He later discounted, when asked directly, the chances of sliding back into recession.

“Our expectation is still for a moderate recovery which will over time bring down the unemployment rate. That’s still our main scenario, that the economy will continue to grow and that private demand will take over as the driver of growth” he said.

Financial markets slumped shortly after Bernanke’s testimony was made public, in part because of his acknowledgement that “the economic outlook remains unusually uncertain” but the thrust of what he said was positive.

Real consumer spending appears to have expanded at about a 2.5% annual rate in the first half of 2010, Bernanke said, with purchases of durable goods “such as large appliances” increasing especially rapidly.

The economic forecast of the Fed’s Open Market Committee (FOMC), which sets the benchmark lending rate that influences borrowing costs across the economy, remains mostly unchanged, he said. Most FOMC members expect the economy to grow at a rate of 3-3.5% this year and 3.5-4.5% in 2011 and 2012, and they anticipate a jobless rate of 7-7.5% by late 2012.

Not everyone agrees with the Fed’s assessment

“This forecast looks a bit optimistic. Our own outlook calls for growth of 2.4% in 2010 and 2.5% growth next year” Mark Vitner, senior economist with Wells Fargo Securities in Charlotte, N.C., wrote in a research note to investors after Bernanke’s testimony.

What Bernanke didn’t say was also noteworthy. There was no mention of the threat of deflation, a fall in prices across the economy.

Deflation leads businesses and consumers to hoard cash on the assumption that prices will be lower soon, and growth skids. The word deflation doesn’t appear anywhere in Bernanke’s 56-page Monetary Policy Report to Congress, either.

Yet some prominent economists fear that the United States is nearing a deflationary cycle like the one now in Japan. They point to core inflation, which strips out volatile food and energy prices. Through June, it was running at a year-over-year rate of 0.9%, the lowest increase since 1966. That’s below the Fed’s target rate of 1-2%.

“Bernanke has thought long and hard about how to avoid a Japanese-style economic trap, and the Fed’s researchers have been obsessed for years with the same question. But here we are, visibly sliding toward deflation and the “Fed is standing pat” columnist Paul Krugman, a Nobel Prize-winning liberal economist, wrote recently.

Krugman’s concerns are shared by John Makin, a highly-regarded analyst at the conservative American Enterprise Institute, a research center. Makin fears that consumers and businesses may begin sitting on cash because it gains purchasing power as prices fall.

“The desire to hold cash is a dangerous part of the deflation psychology” he warned, noting that deflation often accompanies a financial crisis.

Near the end of his lengthy testimony, Bernanke was asked directly about deflation and he discounted the threat.

“Forecasts are very uncertain, but I don’t view deflation as a near-term risk for the United States” he said, noting that the Fed would be “assiduous” should deflation emerge. As the economy picks up steam, inflation will start ticking back toward the 2% range, Bernanke said.

A striking feature of SBI that makes it stand out among several others is the fact that the interest is levied based on the daily/monthly reducing balance. While others use the annual reducing balance method, SBI offers an advantage to the customer. He does not have to pay interest on the amounts he keeps repaying. The interest is computed only on the loan amount that is presently outstanding. Since, this figure goes down with every EMI, the effective rate of interest is considerably reduced.

Getting the ICICI Advantage

ICICI Bank is one of the top most approached banks, easily India’s second largest lender. ICICI bank loan interest rates have also been significantly lowered keeping in mind the need of the hour. A 50 basis point reduction in the benchmark lending rates is evident from the fall to 15.75 per cent. The floating reference rate, which applies to floating rate retail loans, has dropped to 12.75 per cent. Though the bank owes the reduction to a decrease in the cost of funds, the borrower’s convenience has enhanced manifold.

Loans are now available from ICICI bank at an increased comfort level. This includes personal loans of all types, including for home, car, education or any other. There are also plans that offer a fixed rate of interest for a period of the loan tenure and then switch to the floating rate. Similarly, ICICI bank loan interest rates for cars are not ruled by a uniform, absurd guideline. They vary according to the car model and the tenure of the loan, which is also dependent on the customer and his location.

Sky rocketing interest rates are no longer the obstacle they used to be. There are people who shy away from a loan even when they have the urgent requirement of one, only because they fear the impossible rate of interest. Gone are the days when wicked money lenders in villages would amass land and wealth by trickery and exorbitance. With reliable and helpful banks like ICICI, SBI and many more, getting a personal loan at a reasonable rate of interest is simple for one and all.

Anew interest rate regime kicked off when the country moved to the Reserve Bank of India (RBI) mandated system of base rate, which is likely to be a more objective interest rate benchmark than the one currently followed – benchmark prime lending rate (BPLR) system. It is also believed that compared to the BPLR system, the base rate regime will bring in more transparency in fixing a rate in the banking system.

In the new regime, interest rates will be benchmarked to base rates with all the lending rates linked to the respective base rates of each bank. This is with effect from July 1. The interest rates on your loan have been fixed against the benchmark rate. Assuming that your present interest rate is nine percent and the bank has fixed the base rate at 7.5 percent, your interest rate will be termed as 1.5 percentage points higher than the base rate. Banks did not hike the mortgage rates, instead, they just pegged them as against their respective base rates. In fact, the new system is likely t
In fact, when the rates are rising, they cannot change it immediately but will have to wait for the new quarter to start. This system has already benefited existing customers. Most banks have announced the base rates on July 1 and 2.

Just after their announcements, the RBI increased the policy rates to make the funds costly. But, now banks cannot change the base rate for the next three months. So, the existing customers will continue to pay the present rate.
Suppose your home loan is at nine percent and the base rate of your bank is 7.5 percent. This means the bank has fixed your rate 1.5 percent higher than the base rate. Now, as the banks can’t change the base rate, you will continue to pay nine percent. But as the cost of fund has gone up, banks might decide to charge higher rates at 9.5 percent from new borrowers by raising the premium over the base rate from the existing level of 1.5 to two percent.

The forecast for higher interest rates has been extended as the Federal Reserve remains committed to maintain a policy of ultra-low interest rates. The released minutes from the last meeting of the FOMC suggest that the majority of Fed policy-makers are weighing the risks of economic slowdown as greater than those of inflation. Until economic activity picks up again in the US, it appears the Fed is satisfied keeping the federal funds rate set at 0.25% and the discount rate set at 3.25%. Mortgage rates remain low for home buyers and home owners according to the most recent survey of American lenders from Freddie Mac. The weekly survey released last Thursday indicated that many mortgage rate averages once again are at record lows. The national average on the 30-year fixed rate mortgage was unchanged from the previous week’s level of 4.57%. The national average on the 15-year fixed mortgage decreased slightly, dropping one basis point from 4.07% to 4.06%. Adjustable-rate mortgages indexed to US Treasury yields were mixed this week according to the Freddie Mac survey. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) increased to 3.85 percent and the 1-year Treasury-indexed ARM averaged fell to 3.74 percent. Adjustable rate mortgages tied to the LIBOR index, a common interest rate benchmark, were also slightly higher this week. The biggest catalyst for the record low mortgage rates in the US has been the continued support of the Federal Reserve of the housing market and the strong demand from investors for US Treasuries. Mortgage rates have been attractive enough to homeowners keep lenders busy with refinancings. Homeowners with fixed mortgages over 5.25% or variable-rate mortgages tied to interest-rate indexes have been advised to compare refinancing rates before interest rates increase again from today’s present levels. Check MoneyRates.com for the best mortgage rates and deals.

Short-term US Treasury yields have stayed in a very narrow range for the first half of July. The 90-day T-Bill is currently yielding 0.16% and the one-year T-Bill is yielding 0.27%, nearly unchanged from the yields that they ended with in June. The benchmark 10-year Treasury note yield can react strongly with economic news and releases. Today, the 10-year Treasury note is yielding 3.00%, but in the last 90 days it has ranged from 3.35% to 2.94%. Economists are forecasting that as the US economy picks up steam, that yields on Treasury notes and bonds could increase back over 4.5%. If the yields increase too quickly, investors who own government bond funds could see some loss in value.

Americans with home equity loans and credit cards that are indexed to Treasury yield averages should also be careful to follow the Treasury yield trend. This scenaraio is not likely before 2011, so savers may have a long wait before they see the +3% savings rates that they crave for their CDs, money market accounts, and savings accounts. Check MoneyRates.com daily for the latest interest rate news and forecasts.

Foreign Prime Rates

Central Bank Rates

Global Interest Rate Report
The European Central Bank has kept their benchmark rate unchanged, following the path set earlier this month by the Bank of England who kept the benchmark lending rate in the UK set at 0.5%. Inflation in both Europe and England is higher than the price inflation recorded recently in the United States, making the decisions of central bankers in Europe more difficult than their counterparts in the United States. The most recent report from England pegged the inflation rate at 3.4%, much higher than the 2% target rate set by the Bank of England. Concerns about economic growth continue to weigh heavy enough on monetary officials to persuade them to keep rates at historic lows despite the risks of inflation.

The Bank of Japan is poised to keep their benchmark interest rate at 0.1 percent, but is facing increasing pressure to take more action to encourage lending and support the Yen. Companies in Japan can have their profitability decrease when the Yen appreciates against major currencies. The central bank in Russia also kept interest rates unchanged at a meeting last month, ending a long period of consecutive interest rate decreases. The improving economy in Russia, coupled with growing price inflation, prompted the Bank of Rossii to keep the benchmark Russian refinancing rate at 7.75% and keep their repurchase rate at 6.75%. Acceptable levels of inflation in Russia have traditionally been higher than the inflation rate found in many major economies because the Russians have traditionally struggled with foreign investment and economic stability. Another foreign central bank, The Reserve Bank of New Zealand, raised their benchmark interest rate a quarter point from 2.50% to 2.75% this month due to inflationary pressures in the New Zealand economy. Forecasts for inflation of over 5% spurred the first rate increase in New Zealand since 2008. Earlier this summer, the Bank of Canada became the first Group of Seven central bank to increase domestic interest rates since the credit crisis began in the summer of 2008. The Canadian central bank lifted the benchmark Canadian overnight lending rate a quarter point to 0.50%. The widely anticipated move was in response to a growing economy in Canada and increased domestic spending. The prime lending rate used by banks in Canada is now 2.50%.

The central bank cut its seven-day deposit rate by half a percentage point to 0.5%, and lowered the overnight deposit rate to 0.375% from 0.5% to spur lending in the economy. The bank has cut the main rate a total of 2.5 percentage points since March 2009.

Latvia exited the European Union’s deepest recession last quarter after exports and industrial production picked up, generating a 0.3% expansion from the previous period.

The economy may contract between 2% and 2.5% this year, Rimsevics said at the press conference.

“The Latvian Bank’s goal by lowering the deposit rates to promote lending will be difficult to achieve,” said Andris Larins, an analyst at Nordea Bank in Riga, in an e-mailed note. “The main obstacle to credit growth is the weak health of the economy and the comparatively small number of quality borrowers.”

Asking rates on the three-month Rigibor, the interbank lending rate, were at 1.96% today, close to a record-low 1.91%. The three-month rate climbed to a high of 29.8% on June 26 when speculation mounted that the country may have to devalue its currency.

The government was forced to turn to a group led by the European Commission and the International Monetary Fund in 2008 for a 7.5 billion-euro ($9.6 billion) loan to shore up the economy.

“Latvia does not need to borrow the whole loan” because it has sufficient funds in its reserves, Rimsevics said. The state will see borrowing costs drop after it adopts its 2011 budget, he said, adding that Latvia has no need to draw on its bailout for the remainder of the year.

Poland, the Czech Republic, Estonia and the Nordic states had previously agreed to lend Latvia money as part of its international loan program. The government agreed with its bailout donors not to enter bilateral loan arrangements beyond the IMF, EU deal, Prime Minister Valdis Dombrovskis said on June 7.

The refinancing rate affects the minimum interest rate on central bank swaps and repurchase agreements, worth about LVL 75 million lats a week.

The central bank has cut its benchmark rate from a record high of 12.75 percent to 6.5 percent by last August, its lowest level since its introduction in July 2005.

But the average bank lending rate was still 12.5 percent in June, down from 14.43 percent in January. Domestic companies say this is still not low enough.

“Ideally for businesses, lending rates should be closer to the benchmark interest rate, so it should be in the single digits” said Ernovian Ismy, secretary general of the Indonesian Textile Producers Association (API).

“The relatively high lending rates are reducing the competitiveness of our industry” he said.

In a sign that Indonesian businesses are finding the rates too high, the level of undisbursed loans by Indonesian banks has stayed stubbornly high.

As of April, undisbursed loans stood at Rp 474.23 trillion ($52 billion) ” 32 percent of the total loans approved by all Indonesian lenders. The figure has risen by 27 percent from Rp 373.72 trillion in April last year.

Sugiarto Kasman, director of cooking oil producer PT Panca Nabati Prakarsa, said the high lending rates were making some Indonesian companies hesitant to take on additional risk, with many companies seeking to borrow money from overseas lenders that offer lower lending rates.

While the benchmark rate has come down from its highs, it is still relatively high compared to neighboring countries.

Malaysia’s benchmark rate is 2.5 percent and China’s is 5.31 percent. The Philippine’s benchmark is 4 percent, Thailand’s is 1.25 percent and Singapore’s just 0.13 percent. Lending interest rates in Singapore are in the 2.5 percent to 3 percent range, while in Malaysia it’s about 6 percent.

Indonesian exporters say lower lending rates would make their products more competitive abroad.

“The relatively high lending rates affect the competitiveness of both the price and quality of the products we export” said Jovian Agustinus, a director at PT 54 Resources, a mid-size company that exports organic vegetables to Singapore.

“To compete with locally made products in export target countries, we have to put a priority on quality and have a competitive price” he said.

“It’s hard to produce quality products cheaply with the high lending rates.”

The chairman of the Indonesian Cement Producers Association (ASI), Urip Timuryono, said if bank lending rates dropped to below 10 percent it would reduce monthly operational costs by 10 percent to 20 percent, allowing companies to allocate more funding to other needs.

PT Bank Central Asia’s director of credit, Dhalia Ariotedjo, said in May that bank lending rates were starting to fall because Bank Indonesia was encouraging banks to lower rates, fostering competition between lenders.

Fadil Hasan, an economist at the Institute for Development of Economics and Finance, said one of the reasons commercial banks had not decreased their lending rates more was because the competition between banks had only recently started to heat up.

“The increased competition has evidently led to the decreased lending rates, which will stimulate businesses due to the lesser burden” he said.

Standard Chartered Bank Indonesia economist Eric Alexander Sugandi said Indonesia’s relatively high benchmark interest rate was partly due to the country’s inflation rate, which was 2.78 percent in 2009.

By comparison, Singapore’s inflation rate in 2009 was 0.9 percent, while Malaysia’s was 0.4 percent.

Eric said that he expected bank lending rates to stay in the 12 percent to 13 percent range for the rest of the year.

Fadil said: “The government and central bank just need to keep an eye on the inflation rate that could begin to creep upward as a result of increased economic and business activity.”

The new SBI rate will come into effect from July 1.

“State Bank of India has fixed the base rate at 7.50 per annum with effect from July 1, 2010,” the bank said in a regulatory filing to the Bombay Stock Exchange.

As per the recommendations of the Working Group on BPLR, the Reserve Bank of India (RBI) had recently decided that banks switch over to the system of Base Rate with effect from July 1.

However, banks are free till December 31 to choose the parameter using which the benchmark rate will be computed.

As per the BPLR system of determining lending rates, banks could charge varying interest on different categories of borrowers.

Businesses benefited from the system, with loans to them being routinely given at below BPLR rates, resulting in a situation where small and individual depositors ended up subsidising the corporate loans.

But with the new norm coming into play, no bank can give out funds at an interest rate lower than the base rate.

Each bank can, however, determine their own base rate, and most banks are in the process of announcing theirs before July 1.

The new base rate by SBI, which controls almost one-fifth of the total loans and advances in the country, will give tough competition to other private lenders and some of its peers to come up with a matching deal.

Markets are keenly watching what ICICI Bank, India’s largest private lender, does, with its announcement on the base rate due Wednesday.

Although cost of funds remains high in the money market, THISDAY investigations revealed that some banks have actually cut their lending rates significantly to make it easy for big corporations to access funds, hitherto starched in their coffers.The big corporates, mainly the prime customers of the banks with thriving businesses in the food sector, manufacturing and processing, telecommunications and services among others, are accessing credit from banks at rates in the region of 11 per cent per annum, which is quite low compared to average maximum lending rate in the market at over 20 per cent.

A treasury with one of the banks explained: “There is no high risk premium on the transactions, unlike when lending to other customers of the bank.” He added: “These are people and organisations that the banks have been dealing with, have come to understand their businesses and can predict the future. Remember that the operating business environment in Nigeria is difficult and so when a customer comes to the bank to borrow money, he doesn’t just have to contend with the cost of the funds to the bank but the risks associated with his business, since a bank puts all that into consideration before arriving at the interest rate” he said.

The Central Bank of Nigeria (CBN) noted at the end of its monetary policy committee meeting last week that developments in interest rates structure indicated that the retail lending rates were still relatively high even though they were declining.According to the Committee, average maximum lending rate dropped to 22.56 per cent in May 2010, from 23.45 per cent in December, 2009. Also, average prime lending rate fell to 18.77 per cent in May 2010, from 19.03 per cent in December 2009.The result of trading activities at the inter-bank money market showed Nigerian Inter-bank Offer Rates (NIBOR), which had remained at about 1 to 2 per cent increasing last week.

The inter-bank lending rates rose to 8.25 per cent on average from 2 per cent the previous week after NNPC caused a major outflow, by withdrawing about N100 billion from the system. There was outflow to foreign exchange and fixed income securities purchases. There was also a dry up of the fiscal inflow in the system, both factors causing the rates to rise, one of the traders said.The NNPC reportedly sold about $600 million to some banks in the last two weeks and recalled part of the naira proceeds to its CBN account last week in compliance with CBN’s monetary control measures.

At the foreign exchange market, the naira, which gained 5 kobo at the first bi-weekly auction last Monday lost the 5 kobo at the second auction (last Wednesday) to exchange N148.50/$1. At the inter-bank market, the naira eased to N150.22 to the dollar from 149.70, which ended its two-week rally against the dollar.

Interest, Lending, Inter-bank, Securities Trading

As stated earlier, the big corporates majorly – the prime customers of banks with thriving businesses in the food sector, manufacturing and processing, telecommunications and services among others are accessing credit from banks at rates in the region of 11 per cent per annum, which is quite low compared to average maximum lending rate in the market at over 20 per cent. But lending rate to the private sector remains high, with the flow of credit falling to the very low levels.

The CBN in its market and economy review last week noted that as at May, 2010 aggregate domestic credit (net) grew by 12.38 per cent over the December 2009 level, and by 29.72 per cent when annualised, which was still below the 2010 indicative target of 55.54 per cent. Credit to government (net), which grew substantially by 50.87 per cent over end-December 2009 (or 122.1 per cent on annualised basis), was the major contributor. Credit to the private sector declined by 1.88 per cent (or 4.51 per cent on annualided basis), in contrast to the growth benchmark of 31.54 per cent for 2010.

The CBN further disclosed that the substantial growth of credit to government (net) against the backdrop of declining private sector credit reflected the risk aversion of banks to lending to non-government borrowers, adding that the “Committee believes that in order to provide the private sector with the necessary credit to grow the economy, further efforts are needed to unlock the credit market in order to enhance the flow of credit to the real economy.

The CBN noted that average savings rate dropped marginally to 2.92 per cent in May 2010 from 3.36 per cent in December 2009. The consolidated deposit rates declined to 3.30 per cent in May 2010 from 6.13 per cent in December 2009. Thus, the spread between the average maximum lending rate and the consolidated deposit rate widened to 19.27 per cent in May 2010 from 17.34 per cent in December, 2009.

CBN noted that the key policy challenges remained the negative growth in money supply and private sector credit as well as the subsisting high lending rates in the face of declining inter-bank rates.On inter-bank lending, cost of borrowing among banks increased last week, across low and high tenored papers, with the low instruments increasing by much higher percentage points.NIBOR increased to 8.25 per cent on average last week from 2 per cent the previous week, attributed to outflow especially that created by the NNPC that withdrew about N100 billion from the system.

The secured Open Buy Back (OBB) climbed to about 7.50 per cent on the average from 1.50 per cent. Overnight and call rates both rose to 8.5 per cent from 2 per cent and 2.50 per cent respectively.One of the dealers said the rates will most likely go up this week because of the extremely tight liquidity in the system.It was gathered that the opening balance in the accounts of banks with the CBN dropped to N54 billion last Friday from about N230 billion a week ago due to huge outflows.

Forex Transactions

The market indicated last week the gradual resurgence in demand for dollars at the market while dollar supply from the oil majors was drying up. The development triggered low performance of the local currency.Traders said some oil majors sold about $29 million by midweek last week but that the sales were not significant enough to support the naira.

As already indicated, the local currency, which gained by 5 kobo at the first in the bi-weekly auction last Monday when it traded N148.45/$1 as against N148.50/$1 previously, lost the 5 kobo at the second auction (last Wednesday) to exchange N148.50/$1. At the inter-bank market, the naira eased to N150.22 to the dollar from N149.70, which ended its two-week rally against the dollar. At the parallel market, traders exchanged N154/$1 as against N153/$1 at the beginning of last week.
The monetary authority sold only $150 million at the second of the bi-weekly auction last Wednesday, short of the $214 million demanded.

The CBN was reported to have made the lowest dollar sales in three months, at its auction last Monday. Banks bought the smallest amount of dollars in more than three months as demand from companies declined. CBN reportedly sold $117.1 million at the auction, the least since March 24, after putting $200 million on offer, the smallest available amount since the auction on March 29.

The foreign exchange market, according to the CBN remained relatively stable in the first half this year. During the period – January 1 to June 16, 2010, according to CBN data, total sales at 45 bi-weekly WDAS auctions amounted to $11,155.10 million, equivalent to an average of $247.89 million per auction. In the corresponding period of 2009, the sum of $12,995.48 million was sold at 70 daily and bi-weekly RDAS auctions, equivalent to an average of $185.65 million per auction.

The market regulator further stated that in May 2010, the average foreign exchange demand of $459.26 million per auction was recorded against the average sales of $394.45 million. As at June 23, 2010 average demand for the month dropped to $315.73 million and correspondingly, the average sales also declined, to $297.69 million, representing sales as a percentage of demand of 94.29.The CBN Governor, Sanusi Lamido Sanusi, told reporters last week that Nigeria is “comfortable” with current naira levels and believes the currency is unlikely to come under pressure, with foreign reserves capable of funding 16 months of imports.

Other Devts: Intervention fund

The CBN announced last week that N150billion out of the N500 billion intervention fund is ready for drawdown and will be accessed by 150 manufacturers before the end of this month.According to the Governor, the fund is targeted at deficit and strategic sectors of the economy. He however, noted that even though the power sector remains a key target, there have been no requests from that sector to access the fund, owing to the non conclusion of the power sector reforms.”So far, we’ve had about 150 companies that are going to borrow under the manufacturing tranche and that is about N150 billion” Sanusi said.

Microfinance

The apex bank also disclosed last week it was considering the Bangladesh model of microfinance for Nigeria. The CBN, said the Governor, will be sending a team to study the microfinance model in Bangladesh as it looks into the smooth operations of the lower segments of the financial sector.The Governor of the central bank of Bangladesh, Atiur Rahman, said Bangladesh authorities are willing to share their experiences in that sector with Nigeria, stressing that the microfinance sector has helped Bangladesh improve its economy and cope with the global financial crisis.

Rahman disclosed that a different body from the central bank regulates microfinance in that country, adding that commercial banks in Bangladesh extend 40 per cent of their credit to the microfinance banks, who in turn channel the fund for on lending to the small and medium enterprises sector as well as agriculture.

D-8 Central Banks
The D-8 central banks from Nigeria, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Pakistan and Turkey met in Abuja last week and expressed their commitments to collaborate on monetary and fiscal issues in the interest of the economies of member countries.

Sanusi said the meeting was necessitated by the role central banks play in national economies, stressing that it has become crucial to review and adopt common regulatory regimes to safeguard financial systems stability and prevent a repeat of recent experience of the global meltdown.

The Minister of Finance, Dr. Olusegun Aganga, said areas of co-operation by D-8 central banks as drawn up by the secretariat was important especially for trade facilitation, adding that as developing countries : “We owe ourselves the duty to promote trade among ourselves in order to grow our economy at a faster rate than North-South trade will ordinarily afford us.”