Every quarter of the year, the Central Bank of Nigeria announces the new Monetary Policy Rate (MPR). The rate serves as a means of controlling economic factors. But why is it your business? Let us find out.
What is the MPR
The Monetary Policy Rate (MPR) is the minimum rate at which the central bank lends to commercial banks. It is used to manage a country's inflation rate. The interest rate is announced every three months. This is on the date decided by the apex bank.
How the CBN uses the rate
There are two primary ways the CBN uses the MPR. One of these is to control inflation. When inflation is high, the Bank will increase the MPR to slow down economic activity. A higher rate is expected to discourage people from borrowing.
For example, a company might want to borrow money to increase production of a product. This will enable it to meet demands. High MPR can discourage management from borrowing. Therefore, the additional unit will not be produced therefore slowing down economic activities and reducing inflation.
Another way the CBN can use the rate is to stimulate economic growth. A higher rate will reduce growth because it discourages investments. But a lower rate will motivate businesses to expand their capacity through borrowing.
A country can lose on foreign direct investment when the Monetary Policy Rate is high. Foreign investors will be discouraged from investing in the country.
Why is the MPR your business
Every Nigerian should be concerned with the MPR. This is because it affects your standard of living. A higher monetary policy rate should contract inflation. However, if businesses go ahead to borrow, because it will not affect their capital structure, prices of goods and services will increase. The adverse effect is a lower standard of living.
Foreign investors can utilise lower interest rates to borrow in Nigeria and use the borrowed funds to invest in another country with higher returns on investment. This could be foreign exchange arbitrage. The higher return of 20% (for example) will pay for the borrowing cost of 12%. Thereby the investor will gain 8%.
A continuously higher rate might discourage investors from maintaining their investment. This is because of the high cost of production. Companies may produce goods in a country with a lower production cost. Then, sell them in a country with a higher cost.
In final words, the MPR is everyone's business. It affects buying and selling, economic growth, and inflation. Individuals and companies that understand arbitrage can use the rate to their advantage.