The Monetary Policy Committee (MPC) of the Central Bank of Nigeria, #CNB has voted to raise the benchmark #interest rate, the Monetary Policy Rate (MPR), by 25 basis points to 18.75% from 18.5%. A move the committee considered necessary and adequate to contend with rising inflation which rose to 22.79% in June from 22.41% in May 2023, as disclosed by the Acting CBN Governor, Folashodun Shonubi, after the MPC meeting on Tuesday.
He said, “In summary, the MPR voted to raise the policy rate by 25 basis points from 18.5 to 18.75 percent.” Mr. Shonubi noted that the committee voted to adjust the asymmetric corridor at +100 and -300 basis points around the MPR.
The MPC left the Cash Reserve Ratio unchanged at 32.5 percent and the liquidity ratio at 30 percent. He said the asymmetric corridor has been narrowed from +100/-700 basis points to +100/-300 basis points.
The central bank said the current foreign exchange volatility being experienced will dissipate soon as pent-up demand is met while the market regulates to an effective and efficient level.
Is this a step in the right direction?
The recent removal of fuel subsidies, the increase in energy prices, and the liberalization of the exchange rate would continue to drive inflationary pressure unless the MPC considers options that will deal with the pressure aggressively.
Following the liberalization of the foreign exchange market, the naira has been depreciating against the dollar, reaching as low as N800/$ occasioned by increased demand over supply.
Shonubi said there was a need to encourage the market to be more efficient and effective, adding that there was a pent-up demand, which the current supply may not be sufficient for. He said the recent reform in the #FX market will improve transparency and encourage more foreign capital inflows.
“As we ease and satisfy the pent-up demand, we begin to see a more efficient market that runs; the #CBN has been intervening and will continue to until the market reaches the level that it should be,” he said.
Speaking about the domestic economy, he said factors driving uncertainty included insecurity within farming communities, high prices of petrol and other energy products, and the pressure on the foreign exchange market.
He noted that the economy will continue to recover moderately to grow by 2.66 percent, according to CBN estimates. Although lower than 3.2% by the International Monetary Fund (IMF).
What is the implication of your existing loan?
The implication of the increase in the MPR means that for your existing loans, it means you will be repaying back the loan based on the new interest rate and not the previous rate. For instance, if you took a loan at the rate of 20% in January, it means you will be repaying at the new rate announced by CBN.
What is the implication on Small Business in Nigeria?
If you are small business owners who took loans to support your business at the previous rate, this means that the new MPR rate would impact on your finance costs, which may impact your profit since you will be paying back at a higher rate than you borrowed.