Here’s how hike in MPR affect your finances

The Central Bank of Nigeria’s (CBN) increase of its key interest rate for the seventh-consecutive time in the last year to curb inflation will affect Nigerians in various ways.

The CBN’s Monetary Policy Committee (MPC) on Tuesday raised the Monetary Policy Rate (MPR) to a 22-year high of 18.75 percent even as its previous rate increases are being felt by households at all income levels.

The Monetary Policy Rate (MPR) is the rate the CBN lends to commercial banks. Commercial banks then use this rate as their benchmark rate for their lending.

The stance was taken to restore balance to the economy caused by the moderate increases to both food and core components. Legacy headwinds, including security challenges in major food-producing areas; high cost of transportation driven by the rising cost of energy; and inadequacies in public infrastructure, continue to drive the rise in food and core inflation.

It was first raised this year in January to 17.5 percent from 16.5 percent, then again to 18 percent in March after the National Bureau of Statistics (NBS) reported a seventeen-year high inflation rate of 21.91 percent in February and in May to 18.5 percent. This is a total of 225 basis points this year.

NBS has reported a consistent surge in inflation rates month-on-month this year despite the quarterly rate hike. The inflation rate for the month of June 2023, increased by 0.36 percent to 22.79 percent from 22.41 percent in May 2023.
How does raising interest rates reduce inflation

Inflation is the rate of increase in prices over a given period of time. It can also be defined in a pedestrian way as too much money chasing too few goods, then by making it more expensive to borrow money. The CBN through the MPC hopes to reduce the amount of money in circulation, eventually lowering prices.

“Monetary Policy Rate is the rate CBN will lend to banks, thus if MPR is raised to 18.75 percent it means all variable loans (example Credit Card interest rates) will see rates rise. Simply put no bank will lend less than 18.75 percent,” Kalu Aja, a personal finance expert said.

He said if MPR is raised, it means CBN wants to make cash expensive to get by making loans expensive (higher bank interest rates) thus reducing cash and credit in the system, it is used when inflation is high

Which consumers are most affected?

“The Central Bank of Nigeria (CBN) monetary policy committee rate hikes will increasingly be felt by borrowers, especially, the non-public non-financial corporations,” said Kaliba Bilala, the founder of Tanabit, an AI-driven data analytics platform. Bilala said that if lenders reset interest rates on loans the burden will be a lot on borrowers.

“If lenders reset interest rates on loans this financial burden is onerous if the non-public non-financial corporations are unable to pass on their rising costs to customers,” he said.

What does this mean for individuals with existing loans?

An anonymous banker at a tier-one bank in Nigeria explained the consequence of the rate hike on existing loans.
“The increase in MPR doesn’t shut down the avenue for individuals to access loans. However, for those with existing loans, it means they have to factor the new interest rate to their loans. For instance, if the loan was given to them at 16percent for the remaining months they are yet to pay they have to factor this new interest rate but a notice would be sent out to them,” he said.

Aja also pointed out that if the existing loan is not fixed, the interest will be adjusted to the new reality. “If the loan is not fixed, yes rates will change,” he said.

How are savers affected

Ayodeji Ebo, managing director of Optimus by Afrininvest in his weekly business and investment tips said there will be a positive impact on savings accounts.

“Lastly, interest on savings accounts will improve (pegged at 30 percent MPR) which is positive for savers,” he said.
For Uju Ogubunka, president of the Bank Customers Association of Nigeria (BCAN), the MPC takes a decision on interest rates and this affects you as a borrower or saver.

He said: “When the CBN raises its benchmark interest rate, the cost of borrowing goes up and banks will increase savers’ rate. If the MPC chose to lower the rate, there would be more money for borrowers.

How does it affect the money market

Ebo explained that so far, the MPR has not had a significant impact on fixed-income yields due to other factors like systems liquidity, money supply, and the tenor of the instruments.
“The increase in MPR has not impacted fixed-income yields due to high liquidity in the financial system, and it has not helped in strengthening the currency,” he said.
Currently T-bills yield on 91-Day, 182-days and 364- days issued on July 12 are 2.86 percent, 3.5 percent, and 5.94 percent respectively.

Akintoye Oyelakun, a Lagos-based portfolio manager said yields might remain pressured despite the increase in MPR “as other factors such as system liquidity also play a major role in interest rate direction”.
He said the MPR was correctly raised by 25bps in response to high inflation, adding that changes in the MPR have not really impacted the interest rate environment historically.

“Instead, investors consider changing interest rates in the money market instruments as a guide towards yield direction. Nonetheless, this is a different regime and one needs to observe what the stop rates at the T-bill auction would look like as this would determine to a large extent what to expect in terms of effectively mopping up excess liquidity. Additionally, I hope the SDF limit would be adjusted significantly higher so that it becomes attractive to the banks,” he said.

How does it affect SMEs

Ebo noted that for SMEs that accessed loans at a floating rate (subjected to change based on MPR), this will increase their finance costs, which may impact their profitability.

What is prompting the rate increase

Inflation is the driver of the consistent rate hike. Nigeria’s inflation rate has persistently increased for the past six months to an 18-year high of 22.79 percent. Increases in both the food and core components of the CPI are the key drivers of headline inflation. “The continued uptick in inflation (month on month), driven by increase in both the food and core components of the CPI, in the view of members, remained a key challenge.”

The report said that following the outlook for the domestic economy, members were of the view that the Committee was confronted with only two policy options, to hold or hike the policy rate to offset the moderate increase in headline inflation. The MPC voted to Raise the MPR by 25 basis points, from 18.50 to 18.75 percent. The MPC said that previous rate hikes had moderately reduced the pace of inflation. “Members agreed unanimously that the previous series of rate hikes had indeed greatly moderated the pace of price increases,” the report said.