The CBN Raises Interest Rate Again!

+What to Expect in the Coming Days

The Central Bank of Nigeria (CBN) has announced an increase in the monetary policy rate from 26.25% to 26.75%, a 0.5% percentage point increase or 50 basis points increase. 

This is the fourth increase in 7 months.

The CBN also fixed the Cash Reserve Ratio at 45% for Commercial banks and 14% for Merchant banks. It kept the liquidity ratio at 30%.

This recent increase re-echoes the reason for the MPR increase in the last MPC meeting in May which is to ensure price stability – rein in the rising inflation rate.

“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,” MPC committee said.

However, the headline inflation has continued to increase despite the increase in interest rates. In June, the headline inflation increased by 0.24% to reach its all time highest of 34.19%.

In retrospect, the Month-on-Month inflation rate decreased between March and May. This decrease might be because of MPC increases in the months of February and March.

The Month-on-Month inflation rate dropped the most in April, but increased in the month of June.

The increase in June implies that the rate of the increase in prices of goods and services is slowly increasing on a Month-on-Month basis.

In response, the Nigerian stock price All Share Index has fallen by 25.10% since the increase in MPR by the CBN in February. It moved from 103,659.81 points in February to 100,486.12 as on July 23, 2024.

What to Expect in the Coming Days

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, Increasing the interest yield on personal savings/deposits in the bank will also affect the dividends for bonds and shareholders.

Dataphyte noted earlier that: “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 the 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 ought to increase.

While the rate hike may reduce the inflation rate by reducing borrowing and money supply, it tends to reduce productivity and stifle investments.

Earlier this year, Aliko Dangote, Africa’s wealthiest individual, asserted that increased bank interest rates would impede economic growth and hinder job creation.