Monetary Policy Rate Stays At 11.5%, How Does It Affect You?

The Central Bank of Nigeria released its much-anticipated Monetary Policy Rate (MPR), otherwise known as the lending rate for the nation’s economy.

The bank which is responsible for formulating and implementing key decisions and policies that affect the supply of money and credit/borrowings in the country maintained or better yet left this rate unchanged at 11.5%.

Other key figures that the bank uses to influence financial institutions, companies, and in a larger spectrum, citizens’ spending and borrowing habits were left unchanged.

The parameters are as follows: The Cash Reserve Ratio (CRR) was left at 27.5%, the liquidity ratio at 30.0%, and the asymmetric corridor around the MPR at +100bps/-700bps.

This decision was carried out after careful assessment of the impact the previous rate had on the economy, the decision of major global central banks on interest rates, the impact of the coronavirus scourge, and the current effect of the fiscal and monetary stimulus on the Nigerian economy.

The Monetary Policy Members comprise of the CBN governor, Godwin Emefiele, Aisha Ahmed, Deputy Governor, Financial Stability, Folashodun A. Shonubi, Deputy Governor, Operations, Central Bank of Nigeria, Kingsley I. Obiora, Deputy Governor, Economic Policy, Central Bank of Nigeria, Edward L. Adamu, Deputy Governor, Corporate Services, Central Bank of Nigeria, Festus A. Adenikinju, Professor of Economics, University of Ibadan, Aliyu R. Sanusi, Associate Professor of Economics, Ahmadu Bello University, Robert C. Asogwa, African Development Bank, Abuja Member, Mike I. Obadan, Professor of Economics, University of Benin Member, Aliyu Ahmed, Permanent Secretary, Federal Ministry of Finance Member.

The Committee looked at two major factors in deciding to continue with the rate unchanged. They were the Gross Domestic Product (GDP)/growth in economic activities, and the state of inflation in the country.

Given the return to economic activity and significantly improved economic performance in Q3-21, the Committee expects the economy to remain on the path of recovery and growth.

The committee expects the economy to grow by 3.10% y/y in 2021E, with a sustained expansion in 2022FY. Although headwinds remain from the global economy, the Committee expects the domestic economic performance to continue to progress on account of improved vaccination, sustained fiscal and monetary stimulus, and a rally in crude oil prices.

Overall, the Committee expects the economy to grow by 2.86% in 2022FY according to the CBN estimate compared to our estimate (2.65% y/y versus 2021E: 2.94% y/y).

On inflation, the committee highlighted with concern the unexpected slight increase in the headline inflation for December (15.63% y/y versus November's 15.40% y/y), largely due to the festive-induced spending in December.

The committee expects inflationary pressure to increase marginally in the short term before moderating at the end of Q1-22 given the bank’s intervention in the agricultural sector and the impact of the dry season’s harvest.

Overall, the committee average inflation rate of 13.64% y/y in 2022FY (2021FY: 16.98% y/y) was maintained.

How does this rate affect you?

First and foremost, the MPR released by the CBN determines the rate at which commercial banks and other loan-granting financial institutions give out loans.

If, for example, the lending rate from the CBN is high, naturally the interest rate attached to the commercial banks' loans will also be high. For instance, M & M Ltd borrows money, let's say N1.75 million from the bank to finance the purchase of new machinery that will increase the rate at which it produces rubber slippers.

The commercial banks and the company (M & M Ltd) agreed on a repayment interest of 12% within a one-year period.

However, when this agreement was reached, the MPR was reading 10.5%. Four months into this agreement, M & M Ltd was notified of a slight upward adjustment to its interest payment due to the fact that the MPR has been increased from 10.5% to 11.5%.

As a result of this change, the interest rate can jump to as high as what the bank feels is accommodating. This is why loan agreements from commercial banks always carry a notice that the interest rate can be adjusted based on "market conditions."

Secondly, the price of goods and services can increase if there is an increase in MPR. Naturally, the prices of commodities sold in the market react to changes in interest rate payments.

The manufacturers have to be able to pay back loans borrowed, and once MPR is adjusted upwards, the cost of existing loans and future loans is likely to be negatively affected. Hence, it will likely have a marginal or small impact on the retail prices of goods bought in the market.

Thirdly, as an ordinary citizen, if you were considering taking out a bank loan to start a small-scale business, the new interest rate is likely to put you off. Assuming the MPR was low, the lending rate from the commercial banks would also be low and vice versa.

Fourthly, the interest rate attached to fixed deposits will increase as MPR increases. So it means that if MPR gets higher, say 12.5%, expect the interest rates attached to your fixed deposit investment at the commercial bank to go up. That will only happen if it’s a freshly booked fixed deposit.

This is just some of the effects a change in MPR will have on ordinary people on the streets.