INVESTORS and borrowers have been badly hit by the Central Bank of Nigeria (CBN) new interest rate, which now stands at 24.75 percent.
At the 294th Monetary Policy Committee (MPC) meeting concluded on March 26, the CBN raised the monetary policy rate, which is the benchmark interest rate, from 22.75 percent to 24.75 percent, representing 200 basis points increase.
The committee retained the cash reserve ratio at 45 percent and the liquidity ratio at 30 percent. The CBN took the decision to rein in inflation which stood at 31.70 percent in February 2024, from 29.90 percent in the previous month.
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Inflation has been on the increase in the last two years in Nigeria and the CBN considers keeping it at par with the interest rate as a priority.
“The considerations of the committee focus on the current inflation pressures and the need to anchor inflationary pressure and sustain exchange rate stability,” said CBN Governor, Dr Yemi Cardoso, after the meeting.
He said the decision was also driven by the need to strenthen the purchasing power of the ordinary Nigerians as soon as possible.
Dr Cardoso noted that the committee was of the view that addressing food inflation was key to containing the inflationary pressure currently ravaging the economy.
Borrowers hit
If you borrowed money from any financial institution last month, your interest rate will have risen during repayment. Hence you will repay more that you earlier bargained with your bank.
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The situation will hurt Nigerian workers the more who are involved in all forms of salary-tied and other levels of personal loans. Hence a worker who borrowed N1 million in January 2023 and was meant to repay N108,250 monthly will now repay N109,750 monthly.
A journalist who works for a state-owned radio station in Imo State, southeastern Nigeria, told Economy Post that he borrowed N500,000 from a tier-1 bank in January 2022 but had repaid over N600,000 due to the rising interest rate.
Businesses are also in the same situation. A Lagos-based small business operator, Ms Eniola Moboriowo, told Economy Post that repayment of loans had eroded her profits, urging the CBN to re-start the suspended intervention programmes to help small businesses to expand.
“The interest rate is simply too much to bear. To make matters worse, intervention programmes were suspended by the CBN when Cardoso became governor.
“I urge the CBN governor to re-consider his stance because that is the only way we, small businesses, can get cheap loans,” he noted.
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Portfolio investors lose
Bond and stock market investors will also have a haircut as inflation and high interest rate often erode their earnings. Economists say that high interest rates lower future valuations of stocks and bonds and reduce the worth of future earnings.
While many economists believe that high rates impact bonds negatively, some insist that it affects bond holders more than stock investors.
“Generally, interest rates and the stock market have an inverse relationship. When interest rates rise, share prices fall,” says an investment dictionary, Investopedia.
“Bonds have an inverse relationship to interest rates. When the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa,” it adds.
Is interest rate antidote to inflation?
The CBN raised the interest rate from 12 percent to 13 percent in May 2022. It raised the rate further to 14 percent in July 2022, to 15.5 percent in September 2022, and to 16.5 percent in November.
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The apex bank has increased the interest rate from that rate to 24.75 percent in February 2024.
But these measures have failed to rein in inflation, which stood at 17.71 percent in May 2022 when the first interest rate was increased to 13 percent – first time in five years. Today, inflation has surpassed the 30 percent mark and could rise further in the coming months, economists say
Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said that incessant increases in the interest rate would not curb inflation, noting that monetary measures alone would not be able to trigger de-inflation.
“We need to begin to look at other fiscal-side situations that trigger inflation such as insecurity, farmer-herder clashes, logistics, infrastructure, among others. If farmers cannot go to their farms, how can food supply rise or food prices fall?” he asked.
Farmers are constantly attacked by herders and terrorists in northern Nigeria, cutting food supply and raising prices. Farm inputs are also hard hit by naira depreciation, with several farmers unable to access fertilizers and modern equipment for food production.
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Roads in several farming communities are inaccessible, and food production is slow in some rural communities due to the lack of sophisticated machinery.
“We need to take a holistic approach to the inflation problem,” said a United Kingdom-based economist, Mr Edwin Dare.
“Tackle insecurity, provide support and incentives to farmers, and reduce every form of tariff on agricultural products and machinery,” Mr Dare suggested.
