How interest rate hike affects Nigerians

The ripple effect of the quarterly increase in interest rate can be felt on the purchasing power, standard of living, and hike in prices of consumer goods, analysts say.

The Central Bank of Nigeria, (CBN), and the Monetary Policy Committee (MPC) raised interest rates twice in two quarters to tackle surging inflation rates and restore balance to the economy caused by the lingering effect of the COVID-19 and also the Russia-Ukraine war.

It was first raised in May to 13 percent from 11.5 percent and then again to 14 percent in July after the National Bureau of Statistics (NBS), reported a five-year high inflation rate of 18.60 percent in June.

NBS reported the highest inflation rate since 2005 in July, at 19.64 percent, analysts told BusinessDay that the equity market recorded a price decline.

According to Investopedia, the interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned. The Monetary Policy Rate (MPR), is the rate at which the CBN lends to commercial banks.

Commercial banks use this rate as its benchmark rate for its lending.

High interest rate increases the cost of borrowing and encourages people to borrow and spend less. It also encourages people to save more.

How does interest rate help lower inflation rate?

Typically when the CBN increases interest rate, it should ordinarily help to curb demand-side inflationary pressures, by reducing the magnitude of the money supply.

Boboye Olaolu, economist and fixed income strategist at CardinalStone said “sources of inflationary pressures in Nigeria are largely cost induced, which limits the impact of the hawkish rendition adopted by the CBN.”

It means inflation is not cost-pushed but demand-push, in that sense inflation is not driven by too much money in the system but a case of increasing cost.

How high can the interest rate go?

Oseghale Ihayere, a certified economist and research analyst believes that in the short-term (30-90 days) the CBN will likely not increase it.

“On the long-term, this is dependent on the performance of the last increment in interest rate,” he said

Boboye explained that the disposition of the CBN is tilted towards uptick rendition which can come in different phases.

Purchasing Power:

Ihayere explained that the hike in interest rate increases the cost of lending which indirectly affects the cost of production businesses.

He said “the burden of cost of production is pushed forward to the consumers.”

This forward push to consumers, results in higher prices of final goods, meaning individuals pay more for such goods.

Standard of living

Ihayere explained that the standard of living moves downwards as the rise in interest rates decreases the purchasing power of individuals.

He said “people cannot afford the lives they were living previously with the same salary.”

He went further to mention basic amenities such as transport, food prices.

Savings

It also encourages people to save more as commercial banks rates are determined by that of the CBN, so a hike in the interest rate (MPR) means an increase in the interest on savings, so it’s more attractive for you to drop your money in the bank.

The CBN increased the interest on savings deposits from 10 percent of MPR (interest rate) to 30 percent interest rate, to encourage bank deposits.

Revenue

Businesses are not left out from the effect of high interest rates as it reduces your ability to get cheap funding.

Boboye said that businesses that are relatively leveraged, high debt will refinance their debt at a very expensive rate which might affect their cash flows and the performance of the company.