Thread by @ugodre

The CBN cut rates by 0.5% to 13.5% yesterday (March 26)

How does this affect you?

Thread

The MPR is the rate at which the CBN lends it borrows money to the bank + or - 2%. Yesterday the CBN reduces the Monetary Policy Rate (MPR) from 14% to 13.5% for the first time since 2015. This was a surprising move and was unexpected.

Typically banks are expected to use MPR as a benchmark to lend money to their borrowers. For example, your loans will include a clause with interest rates as MPR Plus 10%. Which would have been 23.5%pa.

Thus a reduction in MPR is expected to translate to a reduction in lending rate. This however is not the case as banks have other considerations before reducing lending rates. I’ll get to that later.

So why does the CBN carry out rates cuts or hikes? In Nigeria, the CBN basically increases MPR to

1. tackle inflation rate by reducing money supply in the economy.

2. To stabilize exchange rate by also reducing money supply.

Basically, the higher the money supply the likelihood of higher the inflation in an economy (especially developing one like Nigeria). It is also an indicator that the exchange rate could depreciate as there will now be more naira chasing the dollar.

When the CBN increases rates, bank lending rates also increases thus dissuading people from borrowing. It also encourages people to lend to the government which is why demand for treasury bills increased over the years. That’s how money supply decreases.

Rate cuts should typically trigger if the opposite of the above and translates to reduced interest rates and more lending for Nigerians. But that’s not the case as banks won’t lend money to you. In fact, things could even get worse for a number of reasons which I’ll get to later

Rate cuts are ineffective because Nigeria’s inflation rate is driven predominantly by structural issues such as ease of doing business, higher taxes, electricity, logistics and transportation issues etc. This is contrary to the west were cost is relatively stable.

Banks are also exposed to these structural issues which is why they won’t reduce your borrowing cost despite the rate cuts. They also factor in things higher like non performing loans and political risks. These factors basically outweigh any benefits rate cuts provide.

As mentioned things could even get worse. For example, analysts believe there might be an increase in the cost of fuel. There is also talk of higher taxes such as Vat. Even if tax rates are not increased, more people will get dragged into the tax net thus increasing their cost.

There is also the likelihood that electricity rates might rise leading to higher input cost for most businesses. These factors are potential headwinds for inflation rate and may well even trigger another rate hike. Another reason why analysts are surprised the CBN cut rates.

Will we ever get single digit interest rates? Yes, provided the government deals with the structural issues I mentioned above. When businesses stop generating their own power, building their own logistics infrastructure, stop relying on foreign inputs for production

Stop building their own roads and providing their own security. Then costs will reduce and this will easily translate to lower inflation and the lower interest rates. For now, the CBN rate cut is a mere theoretical exercise that has little effect on your borrowing cost.

For investors in treasury bills, I see no major effect. Actually, the decision to cut rates is influenced by the huge demand for treasury bills and FGN bonds. To think that in the thick of the election, demand for treasury bills actually rose.

Bottom line, rate cuts in Nigeria such as the one announced by the CBN will have little to no effect on your finances.

Please go about your business like nothing happened.

May God continue to bless your hustle.

*End*