CBN Interest Rate Hike, highest in 20 years
Ejes Gist Newspaper reports that In the just finished monetary policy meeting, the Central Bank of Nigeria increased the benchmark interest rate (MPR) to a record-high 15.5%, representing a 150-basis point increase from 14%.
The fact that this rate is the highest in 20 years is evidence of the CBN’s vigorous efforts to control inflation.
It is important to note that other central banks have increased interest rates in the majority of the world’s economies in an effort to control the inflationary trend.
The US Federal Reserve created history last week when it decided to raise interest rates for the third time in a row by 75 basis points in an effort to combat inflation in the US economy. This is the highest level the fed’s funds rate has been since the 2008 global financial crisis.
Regulators of monetary policy frequently utilize interest rates as a key instrument to control the economy’s liquidity and combat growing inflation rates.
High interest rates, however, have also been seen to be harmful to economic expansion. The MPR and CRR were both increased by the central bank to 15.5% and a minimum of 32.5% in an effort to control inflation and mop up liquidity.
It is crucial to think about how this interest rate increase can impact your savings, accounts, and credit applications
Stocks will lose their appeal.
As investors attempt to reallocate their capital to other assets, particularly those denominated in dollars, stocks as an investment option could lose its appeal.
Remember that the Nigerian Exchange’s All-Share Index had increased by over 21% in the first half of the year, but that growth slowed in the third quarter and lost over 5% after the top bank decided to boost interest rates in May 2022.
high loan interest rates
Rising interest rates is intended to deter excessive spending by raising the cost of borrowing, which would deter enterprises from requesting bank credit.
The economy could suffer as a result since the real sector will have less money to meet demand for expenditure.
Long term decline in bank revenue
Banks would receive more money in interest payments in the near term, but when loans start to drop over time, their interest revenue will be impacted.
Additionally, they run the danger of having lower profits because to CRR’s CBN deductions.
It should be noted that the CBN governor stated during the media conference that the central bank will implement aggressive CRR measures by capturing liquidity from commercial banks.
The exchange rate can decline even further.
The naira may decline more against the US dollar due to Nigerians’ speculative tendency to hedge against the local currency by purchasing foreign exchange and a potential increase in FX demand because of the upcoming 2023 elections.
The naira earlier reached a record high of N722/$1 on the illicit market and that the Nigerian economy is still severely hampered by a lack of dollars.
However, if savings deposit rates increase to encourage Nigerians to save their money, the naira may become more alluring.
Other aspects of the economy that the interest rate increase may impact are;
- Most banks, especially microfinance banks, are at risk of default.
- Real estate will be enticing as a purchase or an investment.
- Yields on commercial bonds will increase.
- Because returns are less than the rate of inflation, your pension fund value will suffer.
- Reduced lending will slow the economy’s growth, which will have an effect on jobs, hunger, and economic expansion.
- People may quickly sell a lot of their assets at low prices in order to pay off debts and other commitments.
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