The Central Bank of Nigeria (CBN) has once again increased the Monetary Policy Rate (MPR) by 50 basis points, raising it from 26.25% to 26.75% in response to surging inflation and sharply escalating food prices.
Olayemi Cardoso, the CBN Governor, made this announcement following the apex bank’s 296th Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, July 23, 2024.
In addition to adjusting the MPR, the MPC widened the asymmetric corridor around the MPR from +100 to -300 basis points to +500 to -100 basis points.
The committee also maintained the Cash Reserve Ratio (CRR) for deposit money banks at 45% and for merchant banks at 14%, while retaining the Liquidity Ratio at 30%.
Cardoso emphasised the committee’s awareness of the impact of rising prices on households and businesses and reaffirmed its commitment to taking necessary steps to curb inflation.
Despite an increase in inflation in June 2024, Cardoso expressed optimism that prices would stabilize in the short term due to the continued effectiveness of monetary policy measures and additional actions by the fiscal authorities to tackle food inflation.
The MPC highlighted ongoing concerns about food inflation and rising energy costs, which pose ongoing challenges to price stability.
Cardoso also announced that the next MPC meeting would be held on September 23 and 24.
Why this matters / how does it affect me?
Nigeria is currently grappling with one of its most severe economic crises in recent history, exacerbated by rising living costs and energy prices stemming from government policies such as the removal of petrol subsidies and the unification of foreign exchange rates in May 2023.
According to the latest data from the National Bureau of Statistics (NBS), inflation in the country reached a record high of 34.19% in June. Food inflation also rose year-on-year to 40.87% in June 2024, compared to 40.66% in May 2024 and significantly higher than the 25.25% recorded in June 2023.
In response to these challenges, the administration of President Bola Tinubu, alongside governors from all 36 states, has implemented various relief measures.
However, Nigerians continue to face severe hardships due to the profound impact of inflation, with prices of food and essential commodities escalating uncontrollably.
The CBN sets MPR to influence the rate at which it lends to commercial banks. The CBN lends and borrows from banks using the Standing Lending Facility and the Standing Deposit Facility. The rates at those windows are determined by the MPR +/- the rates.
Commercial banks as a knock on effect use the MPR to determine their interest rates. A higher MPR means banks charge higher rates on loans to cover their costs, while a lower MPR allows for cheaper loans.
Adjusting the MPR affects economic activity as increasing the MPR makes borrowing more expensive, thus reducing spending and investment to help control inflation. Alternatively, lowering the MPR makes borrowing cheaper, stimulating economic activity but potentially increasing inflation.
The CBN further increasing the MPR then impacts financial activities in several ways, from loans and mortgages, to credit cards, savings accounts, return on investments, and investment strategies.
Commercial banks are expected to increase their interest rates on loans, mortgages, and credit cards, leading to increased monthly payments and overall borrowing costs, therefore potentially slowing down economic activity and inflation.
With regard to savings accounts and return on investments, an increase in commercial banks’ interest rates often translates to higher returns on savings accounts, fixed deposits, and return on investments.
Higher interest rates however can also negatively impact stock markets as companies face higher borrowing costs, therefore reducing profitability.
The real estate market could see a slowdown in price increases as higher mortgage rates make property purchases more expensive, meaning a reduction in demand and potentially decline in prices.
YOU MAY ALSO READ: Kenyan Police urge protesters to avoid main Airport, enhance security measures for passengers