The Monetary Policy Rate (MPR) is the benchmark interest rate set by the Central Bank of Nigeria (CBN) to influence the cost and availability of credit in the economy.
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The MPR affects various aspects of the economy, such as inflation, exchange rate, growth, and employment.
In this article, we will answer some of the common questions about the MPR and its implications for Nigeria.
What is the current MPR in Nigeria?
- The current MPR in Nigeria is 22.75%, as of February 27, 2024.
- This is the highest MPR in the history of Nigeria, and represents a 400 basis points increase from the previous rate of 18.75%.
- The CBN announced the hike in the MPR after the 293rd meeting of the Monetary Policy Committee (MPC) held in Abuja on February 26-27, 2024.
Why did the CBN raise the MPR?
- The CBN raised the MPR to combat the rising inflation and depreciation of the naira in the country.
- The inflation rate in Nigeria reached 19.8% in January 2024, the highest in over a decade.
- The naira also weakened to N600 per US dollar in the parallel market, as the CBN struggled to meet the demand for foreign exchange.
- The CBN governor, Mr. Olayemi Cardoso, said that the MPR hike was necessary to “signal the bank’s strong commitment to price stability and to anchor inflation expectations”.
How does the MPR affect the economy?
- The MPR affects the economy through various channels, such as the money market, the banking sector, the foreign exchange market, and the real sector.
- The money market is where short-term funds are borrowed and lent among financial institutions. The MPR influences the inter-bank call rate, which is the interest rate at which banks lend to each other overnight. The higher the MPR, the higher the inter-bank call rate, and vice versa.
- The banking sector is where banks provide loans and deposits to customers. The MPR affects the lending and deposit rates offered by banks. The higher the MPR, the higher the lending and deposit rates, and vice versa.
- The foreign exchange market is where currencies are traded. The MPR affects the demand and supply of foreign exchange, and hence the exchange rate of the naira. The higher the MPR, the more attractive it is to hold naira-denominated assets, and the more demand for the naira. This tends to appreciate the naira, and vice versa.
- The real sector is where goods and services are produced and consumed. The MPR affects the cost of production and consumption, and hence the output and employment levels. The higher the MPR, the more expensive it is to borrow and invest, and the less demand for goods and services. This tends to reduce the output and employment, and vice versa.
What are the benefits and risks of a high MPR?
- The benefits of a high MPR are that it can help to reduce inflation and stabilize the exchange rate, which are important for macroeconomic stability and confidence.
- The risks of a high MPR are that it can hurt the growth and employment prospects, especially in a recessionary environment, as it can discourage investment and consumption.
- The CBN has to balance these trade-offs and find the optimal level of the MPR that can achieve its objectives of price stability and economic growth.
What are the expectations for the future MPR?
- The expectations for the future MPR depend on the economic conditions and the outlook of the CBN.
- If the inflation and exchange rate pressures persist or worsen, the CBN may decide to raise the MPR further to tighten the monetary policy stance.
- If the inflation and exchange rate pressures ease or improve, the CBN may decide to lower the MPR to loosen the monetary policy stance.
- The CBN may also keep the MPR unchanged if it believes that the current level is appropriate and effective.
- The CBN usually reviews the MPR every two months, after the MPC meeting. The next MPC meeting is scheduled for March 25 and March 26, 2024.
