BUSINESS DAY
The Olayemi Cardoso-led Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the main interest rate by 400 basis points on Tuesday to 22.75 percent. The bumper rate hike, aimed at curbing inflation and stabilising the economy, will affect investors, borrowers and savers in various ways.
The monetary policy rate (MPR) is the rate at which the CBN lends to commercial banks. Commercial banks then use this rate as their benchmark rate for their lending.
The National Bureau of Statistics has reported a consistent surge in inflation, with the headline inflation jumping to 29.9 percent in January from 28.92 percent in the previous month.
The MPC also increased the cash reserve ratio (CRR) to 45 percent from 32.5 percent, and the liquidity ratio was retained at 30 percent. The asymmetric window was adjusted from +100/-300 basis points to +100/-700 basis points around the MPR.
Analysts at BancTrust & CO said the outcome of the meeting confirmed the move towards inflation targeting and the much-needed liquidity tightening to stem the depreciation of the naira.
“While some of the drivers of headline inflation (29.9 percent in January 2024) are structural, a tighter monetary policy supporting price discovery in the FX market and an appreciation of the naira could ease imported and domestic food inflation, the latter through lower energy and fertiliser cost,” they said.
Joshua Joseph, fixed income analyst at CSL Stockbrokers, said the rate hike will have a ripple effect across the economy, impacting borrowers, savers, and investors in different ways.
He said the interest rate hike for investors investing in the fixed-income market remains very attractive at this rate.
“T-bills in the secondary market are doing about 16 percent compared to historically, which is very attractive. Pension fund administrators will make large returns compared to what they’ve been making in years and fund managers,” he said.
He added: “What they have been doing for a while now is to mop up liquidity and with this, it’s looking more difficult for banks to make money.
“With CRR at 45 percent, the amount of money available for businesses to borrow will reduce because the loans will have very high rates, so there’ll be little money for the multiplier effect to take place.”
Joseph said rates will go up on the money markets, such as bonds, and T-bills as they are already doing well, “At the next auction of the T-bills, we are going to see it well oversubscribed, It’s a good note for investors.”
He said that for savers, when CBN increases the MPR, banks also increase their lending rate. “The interest rates on savings are going to increase but not as much as lending rates; interest on savings won’t be that high.”
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