FIJ
For the fifth time in 2024, the Central Bank of Nigeria (CBN) has decided to increase the monetary policy rate (MPR) by 50 basis points, meaning that the MPR has increased from 26.75% to 27.25%.
This new MPR, or interest rate, was announced on Tuesday at the Monetary Policy Committee (MPC) meeting chaired by CBN Governor Yemi Cardoso.
Apart from this, Cardoso also said the MPC voted for an increase in the cash reserve ratio (CRR) on bank deposits to 50% for commercial banks and 16% for merchant banks.
What do the new MPR and CRR mean for Nigerians? What are their effects on macroeconomy and why should anyone care about them?
The monetary policy is one of the ways central banks control overall money supply and inflation. Cardoso had argued that the reason behind the increase was inflation control. Nigeria’s inflation rate as of June stood at 34.19%, according to the National Bureau of Statistics (NBS).
The newly increased interest rate would affect the interest percentage added to money borrowed from banks. An increase means that loans will become more expensive because borrowers will need to add more to their loans when they pay back their debts.
The CBN has used this to discourage borrowers from borrowing, businesses and individuals alike. Lesser borrowing means that people would now have less to spend, and their purchasing power is now reduced, which also translates to lesser demand for goods and services.
Lesser demand should expectedly bring about a fall in the prices of commodities in line with basic demand and supply principles. This was what birthed the MPC’s decisions.
On the other hand, the CRR is the percentage of a bank’s total deposits that must kept in reserves as cash, either in the bank’s vaults or as savings with the CBN.
The MPC’s decision on Tuesday, therefore, insinuates that commercial banks like FCMB, Access, GTB, Fidelity Bank and other commercial banks must now keep 50% of their deposits in their vaults or save it with the central bank, while merchant banks like Nova merchant and Rand merchant must keep 16%.
To put this in context, if customers deposit N1 million with a commercial bank, that bank must save N500,000 (50% CRR) in their vault or with the CBN, while merchant banks must reserve N160,000 (16% CRR) from every N1 million deposit.
HOW DOES THIS AFFECT THE AVERAGE NIGERIAN?
Nigerians who have monies in fixed deposit accounts can smile as the increased MPR will also influence the interest rate on their fixed deposit savings in banks. In this way, the CBN is encouraging more savings than spending, which is also a way of reducing the urge to spend rather than save.
Furthermore, the increased interest rate now means that banks will enjoy higher interest on the reserves they save with the CBN since bank-CBN relationships can be likened to a customer’s relationship with their bank.
So, since there is now more interest in it for banks when they save with the CBN, and they must now reserve 50% of their deposit, it means they will now have less cash to lend to borrowers, and when they do, they will charge higher interests to make it worth the while.
This means that there should be less cash in circulation which should also equate to less spending; and lesser spending means lesser demand, which should in turn lead to a fall in the prices of goods. But experts are divided on this since the future could be hard to predict.
EXPERTS DON’T THINK MPR INCREASE IS THE WAY TO GO
Paul Alaje, an economist and financial expert, says that the MPR and the CRR increase is not a new approach. And from what he knows, the previous increases did not have a direct impact on inflation.
“Inflation has remained stubborn and it has been growing steadily against efforts by the central bank and the monetary policy committee to combat it using monetary tools of CRR liquidity ratio sometime and MPR,” Alaje told FIJ on Thursday.
“Sometimes, they even adjust at the very corridor, but I can tell you that some of these policies have really not been sufficient in combating inflation.”
Alaje explained that despite the relative decrease in inflation in July and August, even Cardoso himself had explained that the reduction was only impacting agriculture.
He also said the NBS had explained that the reduction was caused by the harvest season, making the food supply increase, thereby causing a reduction in food prices.
CONTINUOUS MPR INCREASE HAS SIDE EFFECTS
Paul Alaje further explained that despite using these tools in the past, the CBN still complained of high money supply in circulation as well as high inflation rates.
He then explained that the continuous use of MPR increase and its failure to tackle inflation would not help combat unemployment.
“You saw the report by the National Bureau of Statistics that the unemployment figures surged from 5.0% to 5.3%. It also crowds out investment, both local and foreign direct investment (FDI),” Alaje said.
He however said that if the MPR trajectory continues, it may induce gross domestic product (GDP) growth, which currently stands at 3.1%.
DESPITE BEING A MAJOR TOOL AGAINST INFLATION, WHY HAS MPR INCREASE NOT REDUCED INFLATION IN NIGERIA?
Muda Yusuf, the Chief Executive Officer at the Centre for the Promotion of Private Enterprise (CPPE), believes that the MPR and CRR increase may have detrimental impacts on manufacturers and investors as it would further stifle the business climate.
“What manufacturers and other investors need at this time is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation. MPR at 27.25%; CRR at 50% and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions,” Yusuf said.
Alaje added that even though some other countries have employed MPR increases to tackle inflation, the fundamentals in those countries differ from Nigeria’s.
“The fundamentals in Nigeria are different because Nigeria is not a credit-based economy, which most of those economies are. Also, Nigeria’s economic structure is not as defined as those countries because the informal sector in Nigeria is over 90%,” Alaje said.
In short, businesses and individuals may find loans more unattractive moving forward. Those who must take loans will pay more on their debt.
Nigerians with savings and cash stashed in fixed deposit accounts will benefit from this increase.
THIS STORY FIRST APPEARED IN FIJ
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