CBN fights inflation back

What is going on here?

On the 27th of February, the Central Bank of Nigeria (CBN) conveyed the Monetary Policy Committee to decide the monetary policy for the economy. Don’t worry if you don’t understand the “jargon” for now, ride with me a little further and everything will become crystal clear.

After the meeting, the CBN governor announced that the committee had decided to raise the monetary policy rate (MPR) by 400 basis points from 18.75% to 22.75%, now MPR is the interest rate CBN charges Banks to borrow from the CBN, yes your Bank borrows from CBN and other Banks. Moving on, the basis point is another jargon that the finance cult uses to make simple stuff sound mysterious. A basis point is a mask for percentage (%), they multiply a percentage figure by 100 and that is the basis point of that figure, so in this case, 400 basis points is just 4%!

Secondly, they decided to increase the cash reserve ratio (CRR)from 32.5% to 45%. The cash reserve ratio is the portion of your deposit that your bank must not lend out to their customers, since Banks are in the lending business, they lend your deposits to their customers at interest, however, they can’t just lend all their deposits out. The CBN requires your bank to keep a portion of the monies you keep with them in cash or with the CBN, just in case you want your money back. The CRR of 45% simply means that, if you transfer N1,000.00 to your GTB account, GTB can only lend out N650.00.

What does it mean for you?

Since the MPR is the rate banks can borrow money from the CBN and their peers, they usually use the MPR as the base for deciding how much interest they should charge their customers who want to borrow from them too. So if you buy goods for resale and the price of the goods from your supplier goes up, it is only normal that you will increase your price too, to maintain your profit. And even now that the bank has less of your cash that they can lend out, it only means that they will increase their lending rates according.

So gear up and don’t be surprised when your bank and even the quick loan apps you use increase the interest rate they charge when next you need a loan.

The good thing

Financial institutions in Nigeria use fixed interest rates for personal loans, so if you have an existing loan, the new rates your creditor will put out won’t affect your current loans.

The big picture

You might want to ask why the CBN is making these decisions, why are they making loans expensive for individuals and businesses? Doesn’t this affect the economy negatively?

It all balls down to what Economists believe causes inflation, to Economists, to put it simply, inflation is a result of too much money chasing a few goods and services, take note of “too much money”. The relationship between the CBN and inflation can be likened to that of the fictional “Tom and Jerry” characters where Tom’s (CBN) job is to chase down Jerry (inflation), it’s one of their primary responsibilities.

In the monetary box, raising MPR is one of the favourite tools Central Banks across the world use to battle inflation, they believe that increasing the cost of debt reduces the money available in the economy chasing those few goods and services, hence cutting general demand to the extent that prices begin to fall.

However, there are arguments as to the peculiarities of different economies and how effective raising MPR is in containing inflation on the loose. Only time will tell while we watch on.