The Central Bank of Nigeria has increased the interest rate for the third time in 2024.
The Interest rate was increased from 24.75% in March 2024 to 26.25% in May 2024.
This announcement was made in the Monetary Policy Committee (MPC) held on May 20th and 21st of 2024.
According to the CBN’s MPC, the interest rate increase is aimed at ensuring price stability – rein in the rising inflation rate and control the volatility in the foreign exchange market.
“Members observed that while year-on-year headline inflation in April 2024 rose moderately, the month-on-month measures of headline, food, and core all declined significantly. This follows a decline (month-on-month) of headline and food measures in March 2024, suggesting that the recent tight monetary policy stance of the Bank is beginning to yield the desired outcomes,” the MPC said.
However, the 0.10% month-on-month drop in the inflation rate alluded to by the CBN is the least drop since the commencement of Mr Cardoso’s MPC.
In retrospect, there was no increase in MPC rates in September and October 2023, yet the month-on-month inflation rates dropped significantly.
So, the prior increase in the MPC rates in February and March 2024 also may not be responsible for this drop in the month-on-month inflation rate as the CBN claimed.
What does a Higher Interest Rate imply for the Average Nigerian?
The increase in the interest rate also known as the Monetary Policy Rate (MPR) is expected to affect the cost of credit, make loans more expensive for both businesses and consumers, increase interest yield on personal savings/deposits in the bank, and affect the dividend for bonds and shareholders.
Dataphyte noted earlier that: “Small-scale businesses may be affected by the decline in credit growth as they often rely heavily on bank’s credit facilities for their operations and expansion plans. Limited access to credit can stifle their growth prospects and hinder job creation.”
The hike in interest rate means that it will cost one more to borrow from the bank.
While a higher interest rate might affect the borrower negatively, it will affect the saver positively. The interest rate paid on your savings will increase.
While the rate hike may reduce the inflation rate by reducing borrowing and money supply, it tends to reduce productivity and stifle investments.