What The CBN Interest Rate Hike Means for Borrowers In Nigeria

The Central Bank of Nigeria (CBN), through its Monetary Policy Committee (MPC), has announced an interest rate hike. Read below to learn what the CBN interest rate hike means for borrowers in Nigeria.

The MPC, which held its first meeting for 2023 on the 23rd and 24th of January, increased the country’s monetary policy rate (MPR) from 16.5% to 17.5%, a 1.0% or 100 basis point increment.

For clarity, MPR is the CBN interest rate upon which all other rates in the financial market, especially lending rates,  are based with significant markups.

Like last time, the Apex Bank is describing the move as an inflation-controlling measure.

Rising inflation

Although the MPC said the increase in the CBN interest rate will stem the rising inflation, it also lists out some other causes of the upsurge.

According to the MPC, the other factors include;

• Ongoing geopolitical tensions in some regions
• Intensified disruptions to the energy market
• Persisting supply bottlenecks
• A resurgence of the COVID-19 pandemic in major industrial cities in China
• Tightening external financial conditions.

It also cited the slow growth in global trade, continued volatility in the oil market, and growing private and public debt portfolios, as clear signals of increasing uncertainty, imposing a drag on growth.

Interest rates and inflation

One of the results of higher interest rates is that businesses may pull back on borrowing and investing. This means consumers and businesses would start spending less and eventually bring demand back down to a level that’s commensurate with supply.

Experts have posited that raising interest rates helps to reduce the overall level of demand and, therefore, hopefully, reduces the upward pressure on prices.

However, in the long run, businesses may respond to consumers purchasing fewer goods and services by reducing production.

As a result, when companies reduce output, they also cut back on inputs and labour so this might end up affecting jobs.

Opinion

A macroeconomic expert, Osio Yemi, has shared her thoughts on the CBN interest rate as a move to slow down inflation in Nigeria.

In her view, the CBN is not focusing on the main cause of inflation as research has shown that the major propellers of inflation are the cost of food, fuel, foreign exchange, and diesel, among others.

She said, “To buttress this, the CBN has been printing more money under Ways and Means”. This is increasing the nation’s debt profile and increasing the amount of money in circulation.

“How can inflation be controlled when money printing isn’t controlled?”

She also noted that the increase in the rate may likely reduce the purchasing power of the naira further.

“This means, prices may be driven higher and we have to pay more to get a particular good or service”. “The major causes of inflation are yet to be addressed, tightening the economy may not be the best move,” she noted.

Also, the Institute for Governance and Economic Transformation (IGET) has released a report in which it advises the CBN to halt the further increase of its MPR and reduce its ways and means of funding the federal government’s budget deficit in order to keep the inflation rate in the country stable.

In a publication titled “Inflation and Poverty in Nigeria: Explainer,” authored by former Deputy Governor of the CBN, Prof. Kingsley Moghalu, and Mr. Damian Kalu Ude, the IGET tasked the CBN with establishing its operational independence.

The institute further recommended that the federal government tame its appetite for fiscal deficits and fix the supply-side constraints in the country’s economy in order to improve productivity and tame the galloping inflation in the economy.

What are interest rates, and how do they work?

In simple terms, an interest rate is the amount a lender charges a borrower. It is a percentage of the principal, the amount loaned.

The interest rate on a loan in Nigeria is typically noted on an annual basis known as the annual percentage rate (APR).

Interest rates rise and fall over time. The interest rate is used to calculate how much you need to pay to borrow money.

Financial institutions set the interest rate for borrowers in Nigeria. This could be a mortgage, personal, payday, or any other type of loan.

As a borrower in Nigeria, you can find your interest rate in your loan agreement. Your financial institution must provide you with certain information about interest rates on your loan.

There are two types of interest rates on loans: Fixed interest rate loans and variable interest rate loans.

Fixed vs.  variable interest rate loans

When you get a loan, your financial institution may offer you a fixed or variable interest rate.

A fixed interest rate will stay the same for the term of your loan. For example, if you take a six-month loan with a 17% interest rate, you will receive the same amount as interest for the duration of the loan.

On the other hand, a variable interest rate may increase or decrease over the term of your loan.

Some lenders may offer you a lower introductory rate for a set period for certain types of loans. Make sure you can still afford the payments at the regular (higher) interest rate.

How will borrowers be impacted?

Most personal and other types of loans carry fixed interest rates that don’t fluctuate during the loan term.

For borrowers in Nigeria who have fixed-rate personal loans, there won’t be any impact on their existing loans.

However, borrowers with variable-rate loans, which are less common, may see their interest rate and monthly payments rise.

The same applies to those who intend to take a loan in the coming days.

To know where they stand, borrowers in Nigeria will need to review their loan agreement or contact their lender to understand how often their rates will change and whether there are caps on rate increases.

The brunt of the impact of rising rates, however, will be on new borrowers.

Whether you’re borrowing money to consolidate debt, make home improvements, or cover other large expenses, you can expect to pay more.

How to deal with a rise in interest rates

As a borrower in Nigeria, an interest rate hike affects you in one way or another.

Pay down your debt as much as possible to deal with a rise in interest rates.

You can deal with a rise in interest rates by using these tips:

• Reduce expenses so you have more money to pay down your existing debt.
• Pay down the debt with the highest interest rate first to pay less interest over the term of your loan
• Consolidate high-interest debts into a loan with a lower interest rate.
• Avoid getting the maximum line of credit that a lender offers you.
• Avoid taking on unnecessary debt for things you want but don’t need.
• Avoid borrowing more money as it could limit your ability to save for your goals.
• Find ways to increase your income to help you pay down your debt. Sometimes, this may mean taking on extra jobs.
• Make sure you have an emergency fund to deal with unexpected expenses, such as covering higher loan payments to avoid penalties.

In conclusion, if you have less debt, you may be able to pay it off more quickly. This can help you avoid the financial stress caused by higher interest rates and bigger loan payments.

Compare loan rates and apply for your funding needs.