EXPLAINER: How CBN’s 22.75% Interest Rate Hike May Affect You

February 27, 2024
interest rate hike

By Dipo Olowookere

Today, the Central Bank of Nigeria (CBN), through its Monetary Policy Committee (MPC) raised the benchmark interest rate, the Monetary Policy Rate (MPR), by 4.00 per cent or 400 basis points to 22.75 per cent from 18.75 per cent.

This rate hike was inevitable, though the margin of increase was not expected.

I know you are asking how this affects you. Hey, listen carefully, you should be bothered and I will explain why.

Now, the MPR is called the benchmark interest rate because it is what commercial banks use to determine the interest rate they give loans to their customers.

If you need to secure a loan to run a business or anything, no bank will likely give you below the MPR, which as of today is 22.75 per cent.

So, if the banks before the current hike gave loans to customers between 20 and 28 per cent when the MPR was at 18.75 per cent, you can imagine what rate they will give you that loan when the benchmark rate is 22.75 per cent, do the math yourself.

And for those who had already taken loans before this rate increment, you are not spared. Expect calls from your banks from tomorrow informing you of an upward review of the rate.

If you say you are still not bothered because you have not had any reason to get a loan from commercial banks, well, I am sorry to inform you that it will also affect you.

How? Let me break it down for you.

A business owner who obtains a loan from a commercial bank at say 30 or 35 per cent based on the current interest rate hike will surely pass this cost to consumers, which includes you reading this explainer.

So, the item you get at N100 today may likely be sold at N150 or more tomorrow because of this CBN announcement.

Then why did the central bank do this at this trying time?

Well, the theoretical reason is to make the cost of borrowing (obtaining loans) more expensive to reduce your purchasing power or spending to possibly bring down the inflation rate. The idea is that if consumers reduce their spending, producers may be forced to bring down their prices to encourage spending, which will, in turn, bring down inflation, which is the average cost of goods and services.

But for investors, the current interest rate is low because it is not more than inflation, which the National Bureau of Statistics (NBS) said was 29.90 per cent in January 2024.

An investor will prefer an environment where the rate is higher than inflation to get a return on investment (ROI).

At the moment, it is at a loss of 7.15 per cent (Interest rate – Inflation rate).

So, do not be surprised when the CBN sells treasury bills at the next primary market auction between 22 per cent and 26 per cent). The coupon rates for FGN bonds will also go up to attract investors.

As for the Cash Reserve Ratio (CRR) the MPC raised by 12.5 per cent to 45 per cent from 32.5 per cent, it is to reduce the significantly cut down on the amount of money commercial banks can make available for lending to customers.

It simply means the banks must keep 45 per cent of the total customer deposits with the CBN. Through this, the central bank is also controlling the supply of money in the system.

If you need any further clarification, please feel free to reach us at [email protected], [email protected] or [email protected].

Dipo Olowookere

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan.

Mr Olowookere can be reached via [email protected]

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