The CBN Raise in Benchmark Interest Rates Could Affect the Economy

The 295th monetary committee meeting was held a while back, which resulted in the Central Bank of Nigeria (CBN) raising the monetary policy rate (MPR) by a whopping 150 basis points from 24.75% to 26.25%. However, the committee retained other parameters, like the 30% liquidity ratio (LR) and the 45% cash reserve ratio (CRR).

The asymmetrical corridor of between -300 and +100 basis points around the MPR remains.

The MPR, also called the benchmark interest rate, is the rate at which the central bank lends to banks, who then lend to end consumers. A hike in this rate leads to an increase in rates for consumers.

There have been different views on the impact of the policy decision, with many analysts concerned about its impact on economic growth and employment levels as it might lead to a rise in the financial costs of companies. Many noted that this is the highest CBR rate hike in several decades and is likely to have a far-reaching, negative impact on businesses and households alike.

Mixed Impacts on Various Sectors

Businesses will Dig Deeper into their Pockets

Businesses and individuals with loan obligations will be forced to dig deeper into their pockets as there will be a hike in interest rates, which will increase borrowing costs. Given that many businesses rely on credit facilities to plug cash flow deficits, an interest hike is likely to lead to an increase in the cost of doing business. Eventually, the end consumer will be the one to pay the extra cost.

Many offshore businesses will not face similar issues and are not likely to increase their costs. Online casinos, offshore streaming services and the like are less likely to change their pricing structures. Gamers in the country can enjoy the fastest payouts in online casinos from leading casino brands such as NZCasinoClub.com across the world without exorbitant withdrawal costs.

It May Attract more Foreign Portfolio Investments

An increase in the MPR may have a positive impact on foreign portfolio investments. Most international investors look for markets that promise a higher rate of return for their portfolios. When MPR increases interest rates, it means that they are likely to get more returns by investing in the economy.

It is expected that the increase in the MPR will raise portfolio investment by a good 0.21 percent. However, for this to have an impact on the economy, the government must also give additional incentives to foreign investors, such as streamlined licensing, support and fast-tracking of the legal framework, to enhance business in the country.

It Could Trigger Portfolio Rebalancing

The MBR increase could also result in portfolio rebalancing in favour of securities that offer fixed income. Such an increase in interest rates has an impact on output as the high cost of funds stifles production. This may lead to some industries struggling to gain and maintain a foothold in their sectors due to this.

On the same note, it will increase the yields in the debt market. This could trigger a migration from equities to debts. Many investors will be looking to profit from the interest rates in the short term. While the equity market will not fall flat, it will experience a significant decline. Areas like the reassurance bills will see an increase in investment, as it is relatively safe and will have better returns than equity.

The Naira will Appreciate

The naira is set to appreciate with the hike in interest rates. Nigeria has had a steady rise in inflation since the start of the year. Economic analysts believe this is the reason why the MPR was raised. The current rate of 150 basis points will see the naira rise to something between N1,300/US$ and N1,400/US$.

It will Lower Inflation

The rise in Naira value will have a substantial impact on the economy. First, it will help curb the rising inflation. However, it will not be enough to bring it down. This is because there are other non-monetary factors at play, such as the high cost of energy, food insecurity, and transport costs. Unless these are dealt with, inflation will still be an issue in the economy.

There will be a Marginal Rise in Capital Inflows

The appreciation of the Naira will have a positive impact on the investment and money markets. It will pull investors to buy in and take advantage of relatively high returns. The marginal capital inflow may help enhance the country’s foreign reserves and sustain the balance with other foreign currencies. Eventually, it may prevent an increase in the cost of imports.

Overall, the increase in MPR will have a mixed impact on the economy. For the residents, it will lower their purchasing power and make it challenging to get affordable credit. The real wages of various workers will go down as the prices of goods and services will also go up.

On the other hand, it may help reduce the runaway inflation affecting the economy, increase capital inflows, and boost foreign investor confidence. Since there are many other non-monetary factors affecting the economy, we wait to see the specific impact this policy change will have on various sectors of the economy and how the government will respond to the challenges.

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