Tuesday’s hike in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN) has raised serious concerns for borrowers, businesses, and pensioners, as the gap between interest rates and inflation has widened to a significant 5.88 percent, intensifying the strain on households and businesses while posing a considerable threat to the nation’s economic growth.
The CBN raised the MPR to 27.5 percent from 27.25 percent, creating a 5.88 percent gap between the inflation rate (33.88 percent) and the MPR.
This decision, announced following the Monetary Policy Committee (MPC) meeting, has significant implications for savers, borrowers, investors, businesses, and pensioners, further burdening already strained households and posing challenges to economic recovery efforts.
The CBN’s move to tighten monetary policy is aimed at combating rising inflation. Inflation represents a general increase in the price level of goods and services over time, reducing the purchasing power of naira.
In theory, raising interest rates should curb inflation by reducing demand for credit. However, in Nigeria’s economic context, experts argued that this approach may not yield the desired outcomes.
Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, explained the complexity in an interview. “The primary function of the central bank is to ensure price stability using instruments such as the monetary policy rate, cash reserve ratio, and liquidity ratio. However, our economic structure does not support the straightforward application of these tools,” he said.
He added, “Unlike Western economies, where credit drives demand, our economy has limited access to credit. How many people here have credit cards or can even approach banks for loans, especially at these high interest rates? We must adapt to our unique environment instead of relying solely on external models.”
Dr. Yusuf emphasized the need for a policy shift that addresses the immediate burden on citizens. “The current situation is burdensome. We need relief, not further tightening,” he stated.
The hike in MPR according to experts is a double-edged sword for borrowers. Those with variable-rate loans will face higher repayments as banks adjust interest rates to reflect the central bank’s policy. This could significantly impact personal loans, mortgages, and car loans, making them more expensive and less accessible.
For fixed-rate loans, while payments remain stable, they are often tied to long-term contracts, leaving borrowers locked into higher rates.
Public policy analyst Lakunle Hammed highlighted the negative consequences of persistent monetary tightening.
“Continuous hikes in interest rates discourage borrowing, limiting access to loans for businesses and individuals. This stifles economic growth and recovery efforts,” he said. Hammed also called for fiscal discipline, urging the government to curb excessive spending that contributes to surplus cash in circulation.
For businesses, especially local producers, the combination of high inflation and steep borrowing costs exacerbates vulnerability to economic shocks. Rising costs reduce profitability and hinder expansion efforts, which are critical for job creation and economic stability.
Economic experts have outlined the relationship between interest rates and inflation. When interest rates are low, borrowing becomes cheaper, encouraging spending and investment. This increased demand can push prices higher, fueling inflation. Conversely, higher interest rates discourage borrowing and promote saving, reducing demand and potentially lowering inflation.
In Nigeria, structural issues such as low credit penetration and limited financial inclusion complicate the expected outcomes of monetary policy adjustments.
As the gap between inflation and interest rates widens, borrowers, businesses, and pensioners must navigate an increasingly challenging economic landscape. Policymakers face the difficult task of balancing inflation control with economic growth. Experts call for a more nuanced approach that considers Nigeria’s unique economic environment.
While higher interest rates may seem beneficial for savers, the reality is more complex, according to analysts.
Savings accounts may offer better returns due to higher interest payments, but inflation often outpaces these gains. This means the real interest rate—taking account of inflation—may still be negative, eroding the purchasing power of savings.
Investors face similar challenges as inflation reduces real returns on financial investments, affecting the value of assets over time. “Inflation can impact different financial instruments differently, so investors need to factor this into their strategies,” explained a financial expert.
The stock market, too, experiences mixed effects. Inflation may increase operational costs for companies, potentially reducing their profitability and share prices. However, some firms may benefit from higher prices for their products, leading to varying outcomes for investors.
According to asset managers, Pensioners are among the most vulnerable groups in times of high inflation and rising interest rates.
Fixed pensions often fail to keep pace with inflation, reducing retirees’ purchasing power. Additionally, insurance premiums and payouts may be affected, further straining financial stability during retirement.
A sectoral analysis highlights the long-term risks for pension savings. Even with consistent contributions, inflation risk persists, potentially leaving retirees with insufficient funds to maintain their standard of living.
Dr. Yusuf urged policymakers to rethink their strategies. “We must reduce over-reliance on textbook solutions and tailor our policies to the realities on the ground,” he said.
Similarly, Hammed emphasized the importance of fiscal responsibility. “Curbing excessive government spending is crucial to stabilizing the economy and supporting local producers,” he noted.
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