The Monetary Policy Committee (MPC) of the Central Bank of Nigeria has voted to increase the Monetary Policy Rate, (MPR) from 12% to 14%.
The committee also voted to retain cash reserve ratio at 22.5% and left the asymmetric corridor around MPC retained at +200 basis point(BPS) & -500 basis points(BPS)
Liquidity ratio was also maintained at 30%.
The MPC arrived at these decisions at the first meeting held in Abuja on Tuesday.
This is the first meeting since the introduction of the new FX market in June.
But what does this mean? According to banker Bayo Adeyinka, MPR is the rate at which CBN lends money to banks. Essentially, everything revolves around the MPR. If it goes down, then the cost of lending by banks to customers goes down and if it goes up, the cost of lending goes up also. Implication for this new increase is that the cost of lending will go up. Current lending rates hover around 23% to 25% and we can expect this to also increase by at least 1% also.
In other words, banks will increase their interest rates on loans. Loans will become more expensive. If you have existing loans, be prepared to pay more as the rates will be tinkered with.
Another implication is that disposable income – the amount of money a person has to spend or save after paying taxes – will shrink especially if you are servicing loan obligations.
The 14 per cent MPR announced by the CBN is the highest in over a decade.
The Chief Executive Officer, Economic Associates, Dr, Ayo Teriba, said the decision showed that the MPC was not sensitive to the plight of Nigerians.
He said, “At a time that the country is on the brink of recession, it is expected that the CBN will support economic recovery by easing the monetary policy. The CBN has been maintaining a tight monetary policy and I believe this may have partly contributed to the situation we are in today. The MPC is not sensitive to the economic situation of Nigerians. I believe this hike will worsen economic recession.
“They should have reduced the MPR and the CRR to provide support for economic recovery. The decision shows that the monetary policy is disconnected from the people.”
Speaking in the same vein, the Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, stated, “The inflationary pressure we are experiencing is caused by cost-push inflation, that is, foreign exchange-related problems and increase in energy costs and the rest. It is not as a result of excess liquidity in the system. So, you cannot say you want to reduce liquidity in the system to fight it.”
The Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the decision would lead to increase in borrowing cost for the Small and Medium-scale Enterprises and that the general economic situation would be very tough over the next few months.
He, however, said the MPC decision was a tactical move to attract the much-needed foreign capital into the economy.
The Chief Executive Officer, Renaissance Capital, a United Kingdom-based investment bank, Mr. Temi Popoola, said the firm welcomed the decision as it would help the CBN to solve the biggest problem of attracting dollars into the economy.
“Today, it appears the biggest challenge before the CBN is how to attract dollars into the economy; and we feel that the decision by the MPC is a good step in that direction,” he stated.