Nigerian Consumer Guide: Understanding the Impact of the Latest CBN Decision

On Monday, 20th of May, and Tuesday, 21st of May, The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) held its 295th meeting to review the recent economic and financial development in the country.

The meeting ended with the following decisions taking effect immediately:

1. Raise the MPR by 150 basis points to 26.25% from 24.75%.
2. Retain the asymmetric corridor around the MPR to +100/-300 basis points
3. Retain the Cash Reserve Ratio of Deposit Money Banks at 45%.
4. Retain the Liquidity Ratio at 30%

What does this mean?

1. Interest Rate: The current MPR is 26.25%, but banks will set their own lending rates based on the MPR, typically adding a spread. 
2. ⁠⁠Cash Reserve Ratio: Banks must now hold 55% of customer deposits in reserve (for instance – if you deposit N1m into the bank,  they can only keep 550k, while the rest is given to CBN).
3. Asymmetric Corridor: The current +100/-300 basis points means that CBN and commercial banks’ intra lending activities can only be from 100 basis points upwards and 300 basis points downwards. 
4. Liquidity Ratio: Following the CBN-MPC meeting, banks are limited to keeping a maximum of 30% of their assets as readily available cash.

According to Yemi Cardoso, the Governor of the CBN, the Monetary Policy stance the MPC has taken since the beginning of the year has helped in the decline of food and core inflation.

Now, how does this affect an average Nigerian?

If you’re a Nigerian investor or saving diligently these days, your investments and savings are currently earning high returns. The current MPR leads to high interest rates on savings accounts, and investment returns are also increasing significantly. In the fixed deposit market, institutions are attracted by these high returns, leading them to invest more.

This situation might seem very attractive at first, but it’s important to remember that higher interest rates on investments also translate to higher interest rates on loans. With this in mind, you might feel that high-return investments favor those with some available savings/extra cash, and not Nigerians who struggle financially due to inflation.

This might be true for some, but for others, it presents an opportunity to become more financially disciplined, building a buffer to invest and save for the future. By managing their finances wisely, they can gradually accumulate wealth.

While we’ve provided some analysis above, we still want to know your thoughts on the CBN decision.

Index:

MPR: (Monetary Policy Rate) A key policy framework for achieving the desired macroeconomic objectives. Also an instrument employed by the monetary authority

Asymmetric Corridor: An asymmetric corridor is when the central bank sets different interest rates for commercial banks depositing money to the central bank versus when they borrow money from the central bank. 

Liquidity Ratio: Liquidity ratios determine how quickly a company can convert the assets and use them for meeting the dues that arise. The higher the ratio, the easier is the ability to clear the debts and avoid defaulting on payments.

Cash Reserve Ratio: (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.