Why the MPR was increased – CBN

The Central Bank of Nigeria (CBN) has increased the Monetary Policy Rate (MPR) from 14% to 15.5% in an effort to control rising inflation. The MPR is the baseline interest rate in an economy on which other interest rates within that economy are based. 

The CBN Governor, Godwin Emefiele, explained that the decision was made due to persistent rising inflation and fragile economic growth. Hassan Mahmoud, Director of the Monetary Policy Department at the CBN, added that the increase in the MPR was necessary to control the quantity of money in the economy and to drive down inflation by making the cost of funds more expensive. 

Mahmoud cited global and local economic issues, such as stimulus provided by governments during the COVID-19 pandemic and the Russian-Ukrainian war, as contributing to the rise in global inflationary trend.

What is the MPR ?

MPR is the interest rate at which CBN lends to commercial banks. The MPR is the benchmark against which other lending rates in the economy are pegged and is usually used as an instrument to moderate inflation in the economy.

An adjustment in this economic parameter by the MPC could either positively or negatively affect an individual through its effect on the prime lending rate (i.e. cost of borrowing).

The prime lending rate is the interest rate at which a commercial bank lends to its most credit-worthy borrowers (usually large corporations, because their risk of default is quite low). Not every customer obtains loans at the prime rate.

Most customers are only able to obtain loans at a rate higher than the prime rate mostly because they are more likely to default on a loan. An increase in the Monetary Policy Rate by the MPC will result in an increase in the price (interest rate) you pay for borrowing and vice versa.

That is an increase in MPR results in a rise in the prime lending rate, and other lending rates by commercial banks, to the public.

What this means for start-ups

The recent decision by the MPC to hold MPR at 14%, implies that start-ups looking to borrow to from banks to fund their operations would only be able to get loan facilities from banks at rates above 14%.

That is, the cost of borrowing would still remain on the high side. At MPR as high as 14%, businesses would continue to face high costs of borrowing and limited funds for local production.

Currently, treasury bills have gone up to about 18%; bond yields are also on the rising. In effect, most banks prefer to play in the treasury and bond markets than to lend money to businesses, because they offer less risk.

Also, businesses who are already indebted to these banks may struggle with paying them back as the interest rate remains hanging and they have to keep paying high for loans borrowed.

Whilst, some of these businesses are currently battling a downturn in revenue from the low sale. This in effect might give birth to an increase in non-performing loans recorded by banks.

The best bet for Startups will be to stay out of commercial lending in the short term. But if you must borrow make sure it is short-term and not more than a tenure of 3 months. This is because, since banks charge interest rates per annum, a 25% interest rate on a N1 million loan for example will cost the business just N62,500 assuming they were to refund after three months.