The Central Bank of Nigeria, CBN, recently raised the monetary policy rate (MPR) and many are worried about how the new CBN interest rate will affect borrowing in Nigeria.
The CBN says it introduced measures to control inflation in the economy, although experts say they will not likely be effective.
Factors causing Nigeria’s inflation
Inflation is caused when there’s too much cash chasing a relatively fewer supply of goods. And the Nigerian economy has seen major supply-side problems, some of which are local, others worldwide.
Some of the factors that trigger inflation in Nigeria include:
The Russian invasion of Ukraine earlier this year sent up the price of crude oil globally as most Western countries imposed a sanction on Russia. This rise in energy costs also triggered a rise in transportation and production costs as most companies in Nigeria rely on diesel-powered generators. This is due to a lack of other sustainable energy.
Several rankings have placed Nigeria as one of the most dangerous countries in the world with terrorist attacks. This also includes the spate of kidnappings, armed robberies, and other forms of insecurity that have a negative impact on the economy.
infrastructural challenges such as poor road networks, dilapidated transportation, and poor power supply have increased the cost of production sending prices high.
The Nigerian elections year is known to spur big spending by politicians as they go into campaigns and try to sway voters. This massive spending in a short period of time is known to threaten currency stability.
Do higher interest rates truly slow down inflation?
Inflation measures the annual increase in average consumer prices for goods and services. Prices are known to rise when either supply is constrained, or demand overtakes supply. Higher interest rates make borrowing more expensive and encourage saving.
Experts say that when debt is costlier, it can in turn influence consumer demand for goods and services, as well as business investment and hiring intentions.
This can help to cool inflation when demand is greater than supply.
In addition, rising interest rates typically lead to a stronger currency on the foreign exchange markets. This helps to reduce the price of imported goods.
America and Europe for instance, both launched aggressive rates recently. This helped strengthen the American currency to its highest level in two decades. The pound has hit the lowest level against the dollar since the spread of the Covid pandemic in March 2020.
Usually, when the central bank raises interest rates, lenders pass them on to consumers and commercial borrowers, and savers.
For loans that have already been disbursed before the increment, borrowers don’t get to see higher costs until they come to the end of the loan term and decide to take another one.
This is one of the reasons the central bank says it can take time for higher rates to counter inflation.
On the flip side, as the CBN raises the interest rate, banks are responding by paying out higher interest to consumers who save with them.
You can take advantage by putting any extra cash into a bank account with these increased savings rates. This way, you get some return on your savings to avoid the value of it dissolving from inflation.
A commentator on the economy, Precious Maduwuike opined that the increase in the monetary policy rate by the CBN has determined the new pricing for loans in Nigeria.
According to Maduwuike, the new policy is a two-way street. While lenders, whether institutions or individuals, will now receive more revenue from investing their funds, borrowers will get to pay more by way of interest.
Interest rate, she said, is a crucial metric in the lending industry. To the borrower, it is a cost of capital and to the investor, it is a profit on the invested funds.
“The cost of loans have scaled up because of the hike in monetary policy rate (which is the interest rate at which CBN sells loans to banks who would, in turn, sell the loans to its customers),” she wrote.
She further stated that the regulatory change may likely affect the market demands for loans in Nigeria.
How the new CBN interest rate will affect borrowing in Nigeria
When interest rates rise, the cost of borrowing money becomes more expensive. This makes purchasing goods and services more expensive for consumers and businesses.
For example, purchasing a home becomes more expensive as mortgage rates rise. The same goes for financing growth for a business. This also becomes more expensive as rates on loans increase.
When this happens, consumers spend less, which results in a slowdown of the economy.
In summary, as interest rates move up, the cost of taking payday loans in Nigeria, or other kinds of loans, becomes more expensive.
When interest rates fall, the opposite effects tend to happen.
How you can take advantage of rising interest rates
As a borrower, all is not gloom. The interest rates on loans in Nigeria are expected to go up, especially for new loans, but there are ways you can take advantage of the new policy.
With the recent increase in interest rates by the CBN, borrowers are faced with the question of how to minimize their borrowing costs.
Here are a few ways to situate your money so that you can benefit from rising rates, and protect yourself from their downside.
Seek fixed rates loans
One of the ways you can protect yourself from high-interest loans is to get a loan that has fixed rates. If you obtained a loan during a period of low interest, an increase in rates does not affect your payment.
Yes, you need urgent cash to sort out that unplanned expense, but it’s time you start thinking of saving. Taking advantage of high-yield savings options will boost your finances.
Some loan apps in Nigeria are known to have savings features. They are also known to offer attractive interest on savings. Online banks, which are looking to keep current accounts and attract more business, are likely to offer far better rates. So it’s worth shopping around.
Pay off outstanding loans before rates go higher
In the event of an increase in interest rates, already existing loans are usually not affected. Private student loans, home equity lines of credit, credit cards, and many other common forms of debt can have variable interest rates, meaning rates rise with the federal funds rate.
Look for deals on loans
As a borrower, you can compare loan offers to see who is offering the best rates.