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.
The CBN cut rates by 0.5% to 13.5% yesterday (March 26)
How does this affect you?
Thread
— Ugo Obi-Chukwu (@ugodre) March 27, 2019
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.
Thus a reduction in MPR is expected to translate to a reduction in lending rate. This however is not the case as banks have other considerations before reducing lending rates. I’ll get to that later.
— Ugo Obi-Chukwu (@ugodre) March 27, 2019
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.
So why does the CBN carry out rates cuts or hikes? In Nigeria, the CBN basically increases MPR to
1. tackle inflation rate by reducing money supply in the economy.
2. To stabilize exchange rate by also reducing money supply.
— Ugo Obi-Chukwu (@ugodre) March 27, 2019
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.
Basically, the higher the money supply the likelihood of higher the inflation in an economy (especially developing one like Nigeria). It is also an indicator that the exchange rate could depreciate as there will now be more naira chasing the dollar.
— Ugo Obi-Chukwu (@ugodre) March 27, 2019
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.
When the CBN increases rates, bank lending rates also increases thus dissuading people from borrowing. It also encourages people to lend to the government which is why demand for treasury bills increased over the years. That’s how money supply decreases.
— Ugo Obi-Chukwu (@ugodre) March 27, 2019
Read the rest of Mr Obi-Chukwu’s explanations below-
Rate cuts should typically trigger if the opposite of the above and translates to reduced interest rates and more lending for Nigerians. But that’s not the case as banks won’t lend money to you. In fact, things could even get worse for a number of reasons which I’ll get to later
— Ugo Obi-Chukwu (@ugodre) March 27, 2019
