Monetary policy (a series of strategies for controlling money supply) plays a significant role in shaping the economic landscape of every country — from economic heavyweights like the United States to developing nations like Nigeria. An important tool within this policy framework is the monetary policy rate (or MPR) — a term that’s seemingly on everyone’s lips these days. But what is MPR and how does it affect you?
The monetary policy rate is the benchmark interest rate set by the Central Bank of Nigeria. It’s a key tool for economic regulation — serving as a guide for other interest rates in the economy — and can indirectly influence how much you earn on savings accounts and certain investments.
In this article, we’ll explain everything you need to know about MPR in Nigeria — from who influences it to what rate adjustments mean. Afterwards, we’ll dive into how the rate can affect your finances and explore how you can use PiggyVest to thrive in the face of fluctuations. Let’s begin!
How does monetary policy work in Nigeria?
The country’s apex bank — the Central Bank of Nigeria (or CBN) — uses the MPR to regulate and influence the country’s economy since it (more or less) dictates the rates at which other financial institutions (including commercial banks) lend to their customers.
When the CBN raises the MPR, borrowing becomes costlier for financial institutions. This, in turn, increases the interest rates they offer to businesses and individuals seeking loans or credit facilities.
Of course, the reverse is also true. Lowering MPR makes borrowing cheaper for financial institutions and can lead to lower interest rates for borrowers.
But how does the monetary policy rate differ from the interest rate?
While the MPR affects baseline interest rates indirectly and is dictated by the CBN, banks and other financial institutions determine interest rates based on various factors like market conditions and credit risk.
Who controls Nigeria’s monetary policy rate?
The Monetary Policy Committee (MPC) of the CBN is responsible for setting and adjusting the monetary policy rate. This committee is made up of experts in various fields (like economics, finance and banking) who bring their knowledge and experience to the table when making decisions about the MPR.
During MPC meetings, members review a wide range of economic indicators — such as inflation rates, GDP growth and foreign exchange rate movements — to assess the current state of the economy.
They also consider how external factors (like the Ukraine-Russia conflict) as well as local trends and events (like crude oil prices) may impact Nigeria’s economy. Based on their analysis, the MPC may decide to raise, lower or maintain the MPR to achieve their monetary policy objectives.
For example, the CBN recently decided to raise the MPR to 26.75% in July of 2024 (compared to 26.25% in June 2024) due to rising levels of inflation.
What does it mean to increase the monetary policy rate?
When the CBN increases the MPR (as it did recently), it signals to commercial banks that borrowing will be more costly. This results in higher interest rates offered by commercial banks to borrowers.
These higher interest rates may then discourage borrowing and investment since businesses and individuals are likely to find it more expensive to access credit.
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Increasing the MPR can also affect the exchange rate of a country’s currency. As interest rates rise, foreign investors may find it more attractive to invest in the country’s financial assets — leading to an appreciation of the currency. This can have positive and negative effects on the economy — affecting exports, imports, and the overall balance of payments.
However, it is important to note that the decision to increase the monetary policy rate is usually taken by the MPC after careful consideration of various economic indicators (such as inflation, economic growth and employment levels).
Why does the CBN adjust the monetary policy rate?
The CBN uses the MPR to control inflation and stimulate economic growth. By adjusting the MPR, it can achieve its monetary policy objectives — which often include maintaining price stability and promoting sustainable economic growth.
By increasing the MPR, the country’s apex bank can reduce the amount of money in circulation and help lower inflation rates. On the other hand, lowering the MPR can encourage borrowing and spending — thus boosting economic activity.
The monetary policy rate also has an impact on the Nigerian Naira exchange rate. When the CBN adjusts the MPR, it can influence the value of the Naira against other currencies (especially the Dollar). This change can then affect imports and exports, as a stronger Naira makes imports cheaper but can hurt export competitiveness.
Still, it’s important to note that while the MPR is not the sole determinant of the exchange rate. Other factors (such as global economic conditions and commodity prices — especially oil for Nigeria) also play significant roles.
How does the monetary policy rate influence the economy?
The MPR has a direct impact on inflation. When the Central Bank adjusts the baseline for interest rates, it trickles down to individual and corporate borrowers. Higher interest rates can reduce borrowing, leading to decreased consumer spending.
This, in turn, can help manage inflation by limiting the money supply and curbing excessive demand.
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However, these changes in the MPR can also impact investment decisions businesses make. When interest rates are high, businesses may be less inclined to take out loans to fund expansion or new projects, which can have a knock-on effect on economic growth and ultimately inflation.
Consider the increase in food prices between 2023 and 2024.
Many people have partly attributed the problem to the CBN’s decision to raise the MPR multiple times throughout 2024.
Allegedly, the higher MPR led to an increase in interest rates on loans — making it more expensive for businesses involved in food production and distribution to borrow money. This then drove up their operating costs, which were passed on to consumers in the form of higher food prices.
Additionally, the increased interest rates discouraged consumer spending, as people were less likely to take out loans to purchase goods and services — including food. This decrease in demand put further upward pressure on food prices.
However, while this explanation does explain one of the ways the monetary policy rate can affect the economy, the relationship between the monetary policy rate and inflation is complex and multifaceted in real life.
Still, it’s important to note that the effectiveness of using the MPR to control inflation can vary depending on the overall economic climate.
How does the monetary policy rate affect your finances?
The MPR indirectly affects your finances through its impact on borrowing costs and interest rates. As we’ve explained, increasing MPR means all financial institutions will raise their interest rates, which will make it more expensive for you to borrow from banks or take personal loans.
Imagine you’re a young professional in Kogi planning to buy a car.
You decide to take a loan from your bank to finance the purchase since you have a fairly stable job and smart money goals. However, due to the CBN raising the MPR to curb inflation, your bank has also increased its interest rates — say from 30% per annum to 40% per annum.
As a result, the monthly instalments on your car loan are higher than you anticipated — eating into your disposable income and affecting your budget.
Of course, this example is for a situation where the MPR increased. If it is reduced, you will have more disposable income since you’ll spend less on monthly instalments.
Still, MPR doesn’t just affect borrowing. It can also impact the interest you earn on savings and investments — potentially affecting your overall financial situation.
For example, we increased interest rates for some of our products on PiggyVest after the CBN increased the MPR in July 2024. This means that you can now earn even more returns by saving and investing on PiggyVest compared to, say, last year (or even May 2024).
Tips for managing your finances during MPR fluctuations
Changes in the monetary policy rate can have far-reaching effects on the wider economy. But you can protect your finances when these changes happen — no matter how intense the fluctuations.
Here are some helpful tips for managing your finances during MPR fluctuations:
- Prepare for higher interest rates. If you have variable-rate loans (where the interest rate changes based on market rates), consider budgeting for potential increases in interest payments.
- Review your investments. Higher interest rates may impact certain investments. Speak to a professional and assess whether you should adjust your portfolio.
- Prioritise saving. As interest rates rise, it may be more advantageous to save rather than borrow. Focus on building an emergency fund and saving for future financial goals.
- Seek professional advice. During periods of monetary policy rate changes, consult with a financial advisor or planner who can provide guidance tailored to your specific financial circumstances.
- Keep an eye on economic trends. Follow vetted professionals on social media (like Kalu Aja), watch the news and read authoritative publications. By staying informed about economic indicators and trends, you can better position yourself to navigate the financial landscape.
Of course, the best tip we can offer is to use PiggyVest to save and invest. Besides the amazing interest rates and world-class security, PiggyVest has amazing products for all your financial needs — from Flex Naira for building emergency funds while earning 12% per annum to Target Savings which pays you 12% interest yearly for goal-driven savings.
Conclusion
The Monetary Policy Rate (MPR) is a vital tool used by the Central Bank of Nigeria to regulate economic activities and control inflation. By understanding how the MPR works and its effects on your finances, you can make smart financial decisions and navigate periods of monetary policy rate changes more effectively.
The articles on the PiggyVest Blog are developed by seasoned writers who use original sources like authoritative websites, news articles and academic journals to perform in-depth research. An experienced editor fact-checks every piece before it is published to ensure you are always reading accurate, up-to-date and balanced content.
