What CBN’s interest rate hike means for you

The Central Bank of Nigeria (CBN) on Tuesday announced a new interest rate in a bid to fight inflation and strengthen the Naira. Here’s a breakdown of what happened and how it might affect your daily life:

Interest Rates Up: Borrowing Gets More Expensive

Imagine interest rates as the price you pay to borrow money. The CBN raised these rates from 22.75 percent to 24.75 percent. This means:

• Loans become more expensive: If you’re considering a loan for a car, house, or business venture, expect to pay a higher interest rate. This might discourage some people from borrowing, potentially slowing down economic activity.
• Savings become more attractive: The flip side is that your savings accounts might offer slightly better returns as banks compete for deposits with higher interest rates. NAIRA

Banks Holding More Cash: Less Lending

The CBN also retained the Cash Reserve Ratio (CRR) at 45 percent for commercial banks, and raised the ratio for merchant banks from 10 percent to 15 percent.

The CRR is the amount of money banks have to keep with the central bank. This essentially takes some cash out of circulation.

With less readily available cash, banks might:

• Be more selective in lending: Banks might become stricter in approving loan applications, making it harder for some people and businesses to access credit.
• Raise interest rates on loans: To compensate for the money they’re holding with the CBN, banks might raise their lending rates even further, impacting borrowing costs.

Liquidity Ratio Up: Managing Money Flow

The CBN also retained the Liquidity Ratio at 30 percent. Liquidity ratio is the amount of liquid assets (cash or easily convertible assets) banks must maintain. Like CRR, this also slows lending and helps manage the overall money supply in the economy.

Based on the figures, if a customer deposits N100 in a bank, a commercial bank is required to keep N45 (45 percent) of that with the CBN. It will also retain another N30 (30 percent LR) in its own vault to meet the customer’s demand. The bank can therefore only lend N25 of that deposit.

Overall Goal: Fighting Inflation and Stabilizing the Naira

The CBN’s main objective is to:

• Reduce inflation: High inflation means your money loses buying power. By making borrowing more expensive and limiting the money supply, the CBN aims to slow down price hikes.
• Strengthen the Naira:  Higher interest rates can attract foreign investment, which can strengthen the naira. A stable Naira makes imports less expensive and Nigerian exports more competitive.

Impact on People:

These measures can have both positive and negative effects on individuals:

• Reduced inflation: If successful, this can lead to reduced and more stable prices for goods and services, making your money go further.
• Slower economic growth: Higher borrowing costs might discourage businesses from investing and expanding, potentially leading to slower job creation.
• Mixed impact on savings: While returns might improve, access to credit could be limited.

It will take some time to see the full impact of these changes. For now, it is best to be mindful of higher borrowing costs before taking out a loan. Look for savings accounts offering improved interest rates and stay informed about inflation trends and adjust your budget accordingly.