MPR, MPC: WHAT’S THE FUSS ABOUT?

Hi everyone,

Welcome to the month of March! Does it feel like the year is zooming by, or is it just me? I might need to revisit my goals for the year and the timelines I've set.

Last week, the internet was abuzz with terms like MPC, MPR, interest rates, 400 basis points, and more. What do these even mean? Don't worry, I've got you covered. And if you missed the news (like my siblings did), I've taken it upon myself to bring you up to speed because, whether you realize it or not, it concerns you.

Before we dive in, here are some basic concepts I want you to understand:

• Monetary Policy: Think of the economy as a car, with money as the fuel that keeps it moving forward smoothly. Monetary policy is like the driver adjusting the amount of fuel (money) going into the engine to make sure the car (economy) moves at the right speed (growth). In simple terms, monetary policy is like adjusting the fuel flow to keep the economic engine running smoothly and at the right speed for growth. According to Investopedia, monetary policy refers to a set of actions taken to control a nation’s overall money supply and achieve economic growth. So, basically, anything related to managing the money supply in the economy falls under monetary policy. The Monetary Policy Committee (MPC) is tasked with these functions.

What is Monetary Policy Rate (MPR)?

MPR stands for Monetary Policy Rate. It's the interest rate at which the Central Bank of Nigeria (CBN) lends to banks and other financial institutions.

So, last week, the Monetary Policy Committee (MPC) raised the MPR by 400 basis points, which is just a fancy way of saying it increased by 4.00%, to 22.75% from 18.75%. This means borrowing money has become more expensive because the CBN is trying to reduce the amount of money circulating in the economy, which is the main driver of inflation in the country.

Let's say GTBank borrows ₦500 million from CBN at an MPR of 22.75%. This means that GTBank will have to pay interest on the borrowed amount based on the interest rate set by the CBN. GTBank would have to pay ₦113,750,000 in interest to the Central Bank of Nigeria over the course of one year for the ₦500 million loan.

What’s the logic behind this?

Commercial banks borrow from the CBN at 22.75%, which means they have to increase the interest rates at which they lend money to individuals and businesses. Previously, banks' lending rates were around 25% to 30%, but now we can expect them to grow to 30%-35%. That's quite high and discourages borrowing because nobody likes paying high interest rates.

Lower borrowing means less money circulating in the economy. If people and businesses have less cash to spend, demand in the market will decrease. This decrease in demand will affect commodity prices, thereby reducing inflation, which is the ultimate goal of these measures. It's all about cooling down our overheated economy.

Now that we understand what MPR is and how it's determined, let's explore how changes in MPR can affect you and your finances.

How does this affect you as an Individual?

• For savers and investors, higher interest rates could be beneficial as returns on savings and fixed-income investments like Treasury bills and government bonds might also see an increase.

• Higher interest rates mean more significant costs for borrowing money. If you’re thinking about borrowing for things like a house or a business, it’s going to cost you more to pay back.

• Companies relying on loans for their day-to-day operations will face increase in costs. This could lead to higher prices for goods and services as businesses try to maintain profitability.

Understanding how changes in monetary policy, like the recent increase in MPR, can impact our daily lives is essential for making informed financial decisions. Stay informed, and remember, we're all in this together!

Finance Terminology of the week:

Monetary Policy- Monetary policy refers to a set of actions taken to control a nation’s overall money supply and achieve economic growth.

Let me know what you think in the comment, and I’m open to any questions!

Have a fantastic rest of the week.