Last November, the Central Bank voted to keep Monetary Policy Rate, at 14% for the 16th consecutive month. The MPR is the rate at which the CBN lends money to commercial banks and is a benchmark used by banks to price interest rates.
In other words, the higher the MPR the higher the interest rate you pay on your personal, vehicle or mortgage loans. It is for this reason that most analysts spend time dissecting the CBN’s monetary policy communiqué issued after the CBN meets monthly.
A higher MPR signals that the bank wants you to have less cash in your hand and leave you with little incentive to borrow and more reason to save. They also force you to lend money to the government because treasury bills rate will also be high.
The CBN has kept this rate at 14% for over a year despite the negative effects it has on consumer and business loans and has presented several reasons for this. More recently, the CBN Governor Godwin Emefiele issued a statement contained in the MPR Communique explaining why he supports higher interest rates.
It is important to emphasise that the current inflation rate, at 15.9 percent, remains at a growth inhibiting level. Hence, the need to retain the restrictive stance of policy without further tightening. I am of the view that the current level of real interest rate is appropriate to balance the objectives of exchange rate stability, price stability and output stabilisation.
I remain personally in favour of low nominal interest rate in the long-run. Nonetheless, a drive to force down interest rate would be counterproductive at this time. It is important to avoid impulsive policy shocks, which could reverse ongoing disinflation, upend the path of recovery and destabilise FX market.
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