On Tuesday, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to raise the Monetary Policy Rate (MPR) to 13 per cent.
While announcing the development, CBN governor, Godwin Emefiele, said six out of eleven committee members voted to raise the rate.
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MPR is regarded as the rate which the Central Bank of any country uses to control liquidity in the economy. Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. If MPR rises, all the other rates go up, and if it’s dropped, all those rates go down.
In Nigeria, the interest rate was pegged at 11.5 per cent for over two years, but Emefiele said it was jerked up to 13 per cent to tame rising inflation.
Emefiele said the committee also voted to retain the asymmetric corridor at +100 and -700 basis points around the MPR and liquidity ratio at 30 per cent.
What Does It Mean to Economy?
By increasing the monetary policy rates, the CBN signalled Deposit Money Banks to increase lending rates which may be raised higher than deposit rates.
Although, increasing monetary rates may be detrimental to manufacturers and exporters who may want to access loans, the positive side of it is that it could aid in slowing down inflation.
The CBN has for long continued to use interventions at subsidised interest rates to agriculture, manufacturing, to targeted credit facilities, to stimulate consumption and investment to yield results and growth for the economy.
Daily Trust understands that when it raises MPR, it tightens up other interest rates; other interest rates like standing lending facility and standing deposit facility.
Banks use lending rates to lend to customers, even fixed deposit rates and then normal savings rates on accounts.
One of the major tools the CBN has used overtime to check liquidity aside MPR is the Open Market Operations (OMO) bills. The CBN prefers to use OMO because it is a quicker way to control liquidity than MPR.
As they issue more OMO, they are able to get out all the liquidity from the system. So, interest rates start to pick up.
This was done in 2016, 2017, and 2018, but reversed in 2019.
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