Fakoyejo OlalekanThe Central Bank of Nigeria (CBN) increased the Monetary Policy Rate (MPR), which is the benchmark interest rate, to 15.5 percent from 14 percent on Tuesday.
Nigeria’s central bank also raise cash reserve ratio (CRR) from 27.5 percent to 32.5 percent. The increase in MPR and CRR followed soaring inflation rate in the country, that has increased cost of living for Nigerians.
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How CBN’s New interest rate and CRR rate affects businesses, lifestyle
The MPR is a benchmark interest rate for which banks offer loan. CBN’s decision to raise it to 15.5 percent means the cost of borrowing money from commercial banks to fund businesses or personal lifestyle will increase. You will have to pay banks more for borrowing less.
This will discourage businesses and individuals from borrowing money, and for those that go ahead to obtain credit, they will pass the cost of the loan to customers through their products and services by increasing prices.
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It will further raise the cost of living in the meantime, but force companies to reduce their prices of goods and services, as customers purchasing power will depreciate due to inflation and cut their demands for these products and services.
Decline in purchasing power will drag revenue down, forcing companies to reduce their prices of goods and services to prevent revenue from falling drastically. In response, inflation will begin to nosedive.
Meanwhile, the increase in cash reserve ratio will see the financial regulator increase the money banks are mandated to keep with the central bank, and in return, banks’ ability to offer loan will drop, due to limited cash.
CRR are often increased in line with hike in interest rate, and it also regulates money supply in the economy. While the raise will reduce liquidity available for lending, it will also cut the liquidity available to banks to invest.
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The CRR helps in controlling inflation rate, reduce cash circulation in the economy, and eventually have a positive impact on the economy.
But the concern is that the liquid cash which the CBN is pushing to squeeze may really be outside the banking system as campaigns fro the 2023 presidential election begins in a few hours (September 28, 2022).
Politicians are suspected to have informally stashed away liquid cash in foreign currencies preparatory to campaigns, as seen in the fragrant display of dollars during primary elections of the ruling All Progressives Congress (APC) and the main opposition People’s Democratic Party (PDP).
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