Understanding how CBN’s new record high interest rate affects you

The Central Bank of Nigeria has raised its benchmark interest rate to a new record high in a bid to force inflation down and support the naira.

The bank’s monetary policy committee increased the key rate to 26.25% from 24.75%. It is 11th straight raise by the committee.

“The key focus of the MPC at this meeting remained to achieve price stability by effectively using tools available to the monetary authority to rein in inflation,” Governor Olayemi Cardoso told reporters at a press conference on Tuesday in Abuja.

The bank’s aim is to reduce money supply and theoretically push demand and prices down. Inflation reached 33.7% in April.

To support that goal, the CBN maintained the Cash Reserve Ratio at 45% and liquidity ratio is 30%, meaning banks are to keep 45% of customer deposits with the central bank and retain 30% in its own vault. Only the balance can be given out as loan.

“Dollars coming”

The CBN has now increased its interest rate by 14.75 percentage points since May 2022.

Analysts expect the move to support the naira which has lost value mainly as a result of shortage of dollars. A high interest rate is expected to attract dollars from foreign investors looking to purchase Nigerian assets such as government bonds.

Mr Cardoso said the country expects a boost in its dollar supply: a $1.05 billion facility arranged by African Export-Import Bank expected at the end of May, possible loans from the World Bank and African Development Bank, and a doubling of remittance flows within a year.

Nigerians living abroad remitted $20.1 billion during 2022, according to World Bank estimates.

What this means

The decision to raise the benchmark interest rate to a record high of 26.25% has implications for Nigerians:

Curbing Inflation: A key objective of raising interest rates is to combat inflation. By increasing borrowing costs, the CBN aims to reduce consumer spending and investment, which can help moderate price increases for goods and services.

Strengthening the Naira: The interest rate hike is also intended to bolster the nation’s currency, the Naira. Higher interest rates can attract foreign investors seeking higher returns on investments denominated in Naira, thereby increasing demand for the currency and potentially stabilizing its value against foreign currencies.

Impact on Borrowers: For borrowers, higher interest rates mean increased costs of borrowing. This includes higher mortgage rates, loan interest rates, and potentially higher credit card rates. Individuals and businesses may find it more expensive to access credit, which can dampen consumer spending and investment.

Savings and Investments: On the other hand, savers may benefit from higher interest rates as they can earn more on their savings deposits and other fixed-income investments. This could incentivize saving and help individuals build wealth over time.

Economic Growth: While higher interest rates can help control inflation and stabilize the currency, they can also dampen economic growth. Increased borrowing costs can lead to reduced consumer spending and business investment, which may slow down economic activity in the short term.