Nigeria’s Monetary Policy Rate (MPR) at 16.5 percent, which is the benchmark interest rate of the country, is the highest among its African peers such as South Africa, Kenya, Morocco, and Egypt at 7, 9.6, 2, and 13.75 percent respectively, according to BusinessDay’s findings.
Nigeria’s monetary policy committee (MPC) has been hiking the country’s interest rate to address the accelerating inflation rate, an impact that is yet to be seen.
With the continuous tightening by the apex bank, deposit money banks lend as high as 25 to 25 percent, according to BusinessDay’s checks.
The benchmark interest rates of most of its peers have remained single digit, barring few, meaning that it is cheaper for businesses to access funds there than in Nigeria.
Economies worldwide, including African countries, are tackling inflation induced by a surge in global food and energy prices triggered by the Russia-Ukraine war. This has forced many central banks to increase their monetary policy rate while warning about the impact of the global economic downturn.
The apex bank of Kenya, in a press statement, from its last monetary policy meeting, said the committee noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy and concluded that there was scope for a further tightening of the monetary policy in order to anchor inflation expectations.
In view of these developments, the MPC decided to raise the Central Bank Rate (CBR) from 8.25 percent to 8.75 percent.
Similarly, the Central Bank of Egypt’s monetary policy committee raised the rate by 200 basis points at an unscheduled meeting to 13.25 percent. The rise – the third this year – brings the total for 2022 to 500bp.
Nigeria’s first rate hike after six years was in May, a 150 basis point increase to 13 percent to curb accelerating inflation and release pressure off the naira.
Read also: NRC increases fare as inflation bites
Since the first rate hike, the benchmark rate has been increased three more times by a total of 400bp to fight the bullish inflation for the ninth straight month and, a 17-year high of 21.09 percent.
Change in interest rate has a ripple effect throughout the economy, affecting the Nigeria stock market, bond market, lending rate, consumer and business spending, asset prices etc.
Interest rate effect on spending
The benchmark interest rate is the anchor for lending rates. According to Investopedia, interest is the amount of money that lenders earn when they make a loan that the borrower repays, and the interest rate is the percentage of the loan amount that the lender charges to lend.
If the benchmark interest rates are lower, the lending rate will be lower; making borrowing attractive to people and in turn there’s more money to spend. Conversely, if the interest rate is high, lending becomes expensive and there’s less to spend.
Effect of interest rate on inflation
When interest rate goes high, lending rate goes high and borrowing becomes expensive and there’s less money in circulation reducing people’s spending power.
Inflation is the increase in the price of goods and services over a period of time. It is monitored with the consumer price index (CPI).
When lending rates are high, the spending power of consumers drops and the demand for goods and services will equally plummet, which will cause inflation to fall, and vice versa when lending rates are low.
How interest rate affects stocks and bond market
Rising interest rate affects stocks performance because bonds and other saving instruments with higher returns are more attractive to savers.
In view of the last MPR increase, analysts at Lagos-based United Capital research had this week expected the impact of the recent 100 basis points (bps) MPR hike to surface in the local bourse, “as investors will look to book profits from the recent rally.
“We expect money market yields to continue to respond to the MPC’s persistent policy tightening, driving renewed interest from investors. In addition, technical signals indicate the market is due a breather following the extended rally.”