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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria recently cut the Monetary Policy Rate (MPR) to 13.50% from 14%. Nairametrics reported that the Cash Reserve Ratio (CRR) was retained at 22.5%.

Following this development, the Founder and Publisher of Nairametrics, Mr Ugo Obi-Chukwu, used his personal Twitter page to explain the implications of the rate cut.

About the Monetary Policy Rate – Mr Obi-Chukwu began by explaining that the Monetary Policy Rate (MPR) serves as the benchmark for bank’s lending to their customers/borrowers.

But does this really apply? – Ideally, a reduction in MPR is supposed to reduce bank’s lending rate. But as Mr Obi-Chukwu explained, this is not necessarily the case because banks consider a whole lot of other factors before deciding to reduce their lending rates.

He explained why the CBN occasionally cut the rates

According to Mr Obi-Chukwu, the Central Bank of Nigeria can either cut rates or hike them because of two major reasons. The first reason is either to tackle inflation rate by reducing money supply in the economy. Secondly, the CBN may also want to stabilize exchange rate by reducing money supply.

He explained that inflation is triggered by when there is a lot of money in circulation. This is especially so for a developing country like Nigeria. He further explained that more naira in circulation could result in exchange rate depreciation. And the reason is because more naira chasing the dollar.

Rate increases dissuades people from borrowing 

Therefore, to checkmate the naira and its circulation in the economy, the Central Bank of Nigeria (through its Monetary Policy Committee), occasionally increasing MPR rates when need be.

However, increasing MPR rates dissuades people from borrowing from banks. This is because banks’ lending rates also increases when MPR rates increase. But the situation also presents an investment opportunity for Nigerians to lend to the Government through Treasury Bills.

Read the rest of Mr Obi-Chukwu’s explanations below-

 

Coronation Research

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