The Central Bank of Nigeria CBN’s Monetary Poly Committee meeting (MPC) was concluded on Tuesday with the decision to hold the policy rates.
According to the communique released by the CBN, the Committee, in consideration of the underlying fundamentals of both global and domestic economy decided to retain the MPR at 14%.
On the external scene, the committee noted that despite the risk from market expectations of expansionary U.S fiscal policy and concern from other global economies, the growth prospects for emerging economies in 2017 are expected to rise to about 4. 6 per cent from 4.3% in 2016.
Also, it noted the World Economic Outlook projection of global output growth which was put at 3.5% 2017 from 3.1 % in 2016; stating that this in effect would have a positive spillover on Nigeria.
The MPC remarked that although the aggregate outputs in the economy contracted by 0.52% in the first quarter of 2017, Nigeria’s economy is on a recovery path.
In addition, the committee also considered the improvement in the Purchasing Manager Index reported in June for both manufacturing and non-manufacturing activities which also signals a positive turn in the economy.
The recent fall in the headline inflation to 16.1% in June which was driven by moderation in the core inflation was also part of what the committee looked into before deciding to hold the policy rates.
In the light of the prevailing domestic economy and the uncertainties in the global environment, the Committee decided by a vote of 6 to 2 to retain the Monetary Policy Rate (MPR) at 14.0% alongside all other policy parameters.
In summary, the MPC voted to:
(i) Hold the CRR at 22.5%
(ii) Retain the MPR at 14%
(iii) Retain the Liquidity Ratio at 30%
(iv) Asymmetric corridor around the MPR at +200/-500bps
The Monetary Policy Rate (MPR)
MPR is the interest rate at which CBN lends to the commercial banks. The MPR is the benchmark against which other lending rates in the economy are pegged and is usually used as an instrument to moderate inflation in the economy.
An adjustment in this economic parameter by the MPC could either positively or negatively affect an individual through its effect on the prime lending rate (i.e. cost of borrowing).
The prime lending rate is the interest rate at which a commercial bank lends to its most credit-worthy borrowers (usually large corporations, because their risk of default is quite low). Not every customer obtains loans at the prime rate.
Most customers are only able to obtain loans at a rate higher than the prime rate mostly because they are more likely to default on a loan. An increase in the Monetary Policy Rate by the MPC will result in an increase in the price (interest rate) you pay for borrowing and vice versa.
That is, an increase in MPR results in a rise in the prime lending rate, and other lending rates by commercial banks, to the public.
The Monetary Policy Rate is currently held at 14%.
It was last increased in 2016 from 12% to 14% – a 2% change.
This implies that there would also be a 2% increase in prime lending rate in the economy.
Banks most likely responded to this hike by jacking up their lending rate as well. The consequence of this is that borrowers would have to pay about 2% more to borrow from the bank.
CBN MPC recently retained MPR at 14%
What this means for start-ups
The recent decision by the MPC to hold MPR at 14%, implies that start-ups looking to borrow to from banks to fund their operations would only be able to get loan facilities from banks at rates above 14%.
That is, the cost of borrowing would still remain on the high side. At MPR as high as 14%, businesses would continue to face high cost of borrowing and limited fund for local production.
Currently, treasury bills have gone up to about 18%; bond yields are also on the rising. In effect, most banks prefer to play in the treasury and bond markets than to lend money to businesses, because they offer less risk.
Also, businesses who are already indebted to these banks may struggle with paying them back as the interest rate remains hanging and they have to keep paying high for loan borrowed.
Whilst, some of these businesses are currently battling with downturn in revenue from low sale. This in effect might give birth to an increase in non-performing loans recorded by banks.
The best bet for Startups will be to stay out of commercial lending in the short-term. But if you must borrow make sure it is short-term and not more than a tenure of 3 months. This is because, since banks charge interest rates per annum, a 25% interest rate on a N1 million loan for example will cost the business just N62,500 assuming they were to refund after three months.