BREAKING: More hardship as MPC increases interest rate to 26.75%

The Monetary Policy Committee (MPC) of Central Bank of Nigeria (CBN) on Tuesday increased its Monetary Policy Rate (MPR) to 26.75 per cent from 26.25 per cent.

Committee after a two-day meeting in Abuja also voted to adjusted the asymmetric corridor to +500bps/-100basis points (Previously: +100 basis points /-300 basis points); retain CRR for Deposit Money Banks at 45per cent, and Merchant Banks at 14per cent and retain liquidity ratio at 30per cent.

The implications of a CBN hike in the MPR are multifaceted, impacting inflation, economic growth, exchange rates, consumer behavior, and financial markets. The overall goal is often to achieve a balance between controlling inflation and supporting economic growth.

The increase in the MPR by the CBN can have several implications for the economy. Part of which are:

Increase in Lending Rates: Banks usually respond to a hike in MPR by increasing their lending rates. This means that borrowing becomes more expensive for individuals and businesses.

Increase in Deposit Rates: To attract more deposits, banks might also increase the interest rates offered on savings and fixed deposits.

Reduced Inflation: By making borrowing more expensive, the CBN aims to reduce consumer spending and investment, thereby decreasing the overall demand in the economy. This can help to control inflation.

Potential Slowdown: Higher interest rates can lead to reduced consumer spending and business investment, which might slow down economic growth. However, this can also stabilize the economy by preventing it from overheating.

Strengthening of the Naira: Higher interest rates can attract foreign investment into the country, seeking higher returns. This can increase the demand for the Naira, potentially strengthening its value against other currencies.

Negative Impact on Stocks: Higher interest rates can lead to lower profitability for companies due to increased borrowing costs. This can negatively affect stock prices.

Increased Cost of Borrowing: The government might face higher interest costs on its debt if it needs to issue new bonds at higher interest rates.

Reduced Consumer Spending: With higher interest rates, consumers are likely to reduce spending, particularly on big-ticket items like houses and cars, which are often financed through loans.

Mixed Impact: While banks might benefit from higher interest margins on loans, they could also face higher default rates if borrowers struggle to meet higher repayment obligations.

Analysts project

Analysts at Cordros Research have hinted that the MPC may hike the  by 100 basis points to 27.25 per cent.

At 26.25 per cent, the committee in 2024 has consistently hike MPR from 18.75 per cent it closed 2023 amid inflationary pressure and scarcity of foreign exchange.  

The analysts at Cordros Research stated that, “As expected, the MPC will assess recent developments in the global and domestic economies since the last policy meeting.

“For the global economy, we note that interest rates have remained elevated. However, central banks are beginning to pivot to monetary policy easing as global inflation approaches set targets.

“On the domestic front, we highlight the resilient economic growth but still elevated inflationary pressures indicated in the further uptick in the June inflation print (34.19per cent y/y).

“Additionally, we point out the increased volatility in the naira primarily due to muted FPI inflows and frail FX interventions from the CBN.

“Therefore, we expect the MPC to maintain a tight monetary policy stance at its upcoming meeting to (1) reduce the negative real rate of return, (2) manage inflation expectations, and (3) stabilize the naira. As a result, we expect the CBN to raise the MPR by 100 basis points to 27.25per cent in its meeting next week.”