What is the Monetary Policy Rate (MPR)?

The benchmark interest rate that the Central Bank of Nigeria establishes is known as the monetary policy rate. It’s a crucial instrument for controlling the economy since it sets the standard for other interest rates in the system. It may also affect your returns on investments and savings accounts.

The MPR severely affects cash flow in the country. If want to know more about the Monetary Policy Rate and how it may affect the economy at large and you in particular, then read on. Everything you need to know about MPR in Nigeria will be covered in this article, including who affects it and what rate modifications entail. 

How does Nigeria’s monetary policy operate?

The Central Bank of Nigeria utilizes the MPR to control and shape the economy of the nation by setting the interest rates at which other financial institutions, such as commercial banks, lend money to its clients.

When the CBN increases the MPR, financial firms incur higher borrowing costs. As a result, they raise the interest rates they offer to people and companies seeking credit facilities or loans.

Naturally, the opposite is also true. Reducing MPR lowers borrowing costs for banks and may result in lower interest rates for consumers.

Who sets the monetary policy rate in Nigeria?

The central bank’s Monetary Policy Committee (MPC) determines and modifies the monetary policy rate. This committee comprises experts in various disciplines, including banking, finance, and economics. They contribute their expertise and knowledge to the decision.

To evaluate the present status of the economy, MPC members examine a broad variety of economic data during meetings, including GDP growth, inflation rates, and changes in foreign exchange rates.

They also take into account potential effects on Nigeria’s economy from both domestic and foreign sources, such as the war between Russia and Ukraine and changes in crude oil prices. To accomplish its goals for monetary policy, the MPC may choose to maintain, reduce, or increase the MPR in light of its analysis.

How does increasing the MPR impact the economy? 

Since inflation is increasing, the CBN has decided to boost the MPR from 26.25% in June 2024 to 26.75% in July 2024. 

The decision was made to rectify the imbalance in the economy that resulted from the mild rises in food and essential components. Food and core inflation continue to climb due to obstacles such as inadequate public infrastructure, high transportation costs caused by increasing energy costs, and security issues in key food-producing regions.

The CBN alerts commercial banks to the impending rise in borrowing costs when it raises the MPR. As a consequence, commercial banks charge borrowers higher interest rates. Due to the increased cost of obtaining credit for both people and companies, these higher interest rates may deter borrowing and investment.

Inflation is also directly impacted by the MPR. To put it simply, inflation occurs when too much money is in circulation, thereby increasing the demand for commodities. And when demand exceeds supply, the prices of commodities go up. 

Individuals and businesses are affected when the Central Bank modifies the interest rate benchmark. Reduced borrowing might result in lower consumer expenditure when interest rates are higher. Reducing the money supply and excessive demand may help control inflation.

Nonetheless, organizations’ investment choices may also be impacted by these MPR fluctuations. Businesses may be less likely to take out loans to support expansion or new projects when interest rates are high, which might have a cascading impact on inflation and economic development.

Think about the rise in food costs from 2023 to 2024. Many have suggested that the CBN’s decision to hike the MPR many times in 2024 is partially to blame for the issue.

It is said that the elevated MPR resulted in a rise in loan interest rates, hence increasing the cost of borrowing for companies engaged in food production and distribution. Their operational expenses increased as a result, and they passed those savings along to customers in the form of higher food prices.

Additionally, since fewer individuals were taking out loans to buy goods and services, especially food, the higher interest rates discouraged consumer expenditure. Food prices were further pushed higher by this decline in demand.

The link between the monetary policy rate and inflation is complicated and multidimensional in real life, even while this theory does describe one way the monetary policy rate might impact the economy.

However, it’s crucial to remember that the general state of the economy might have an impact on how successful the MPR is in containing inflation.

Raising the MPR may also have an impact on a nation’s currency exchange rate. The country’s financial assets may become more appealing to foreign investors as interest rates rise, which might increase the value of the currency. The CBN’s adjustments to the MPR have the potential to affect the value of the Naira relative to other currencies, particularly the US dollar. A higher Naira lowers the cost of imports but may reduce export competitiveness, therefore this move may have an impact on both imports and exports.

It’s crucial to remember, however, that the MPR does not determine the exchange rate alone. Other important considerations include the state of the world economy and the price of commodities, particularly oil for Nigeria.

It is crucial to remember that the MPC typically decides whether to raise the monetary policy rate only after carefully weighing several economic indicators (such as inflation, economic growth, and employment levels).

What causes the CBN to make MPR adjustments?

The MPR is a tool used by the CBN to manage inflation and promote economic expansion. It may accomplish its monetary policy goals, which often include preserving price stability and encouraging sustainable economic development, by modifying the MPR.

The nation’s central bank may curb inflation by reducing the quantity of money in circulation and raising the MPR. Lowering the MPR, on the other hand, may promote borrowing and spending, which would increase economic activity.

How does the MPR affect your finances? 

Because of its effect on interest rates and borrowing expenses, the MPR indirectly impacts your finances. As previously mentioned, a rise in MPR entails an increase in interest rates by all financial institutions, meaning that borrowing from banks or taking out personal loans would become costlier.

But MPR has an impact on more than simply borrowing. It may also affect the interest you get from investments and savings, which might affect your whole financial status. Savings account investment returns will rise, which is good news. 

What does an increase in MPR signify for those who already owe money?

The door for people to get loans is not closed by the rise in MPR. Those who already have loans, however, will need to adjust their payments to reflect the increased interest rate. For example, if the loan was granted to them at 16 percent, they would need to calculate the increased interest rate for the months they have left to pay. 

Conclusion

One essential instrument the Central Bank of Nigeria uses to manage economic activity and keep inflation under control is the Monetary Policy Rate (MPR).

You may manage times of monetary policy rate adjustments more skillfully and make wise financial selections if you comprehend how the MPR operates and how it affects your money.