How do you engineer price stability while supporting the recovery of output growth. In secondary school, our economics teachers explained the impact of inflation on the prices of basic commodities. But if you elevate that conversation, you would see that lending rate and inflation are the two most consequential factors Nigeria’s central bank has to deal with right now. In this plot below, you can see how prices of basic food items have gone up. So, if you reduce lending rate, triggering excess supply of money in the economy, there would be more inflationary pull on those prices.
So, what do you do? You raise lending rates. But doing that would prevent companies which need “cheap” money to invest and drive production. Cheap money comes partly from cheaper lending rates. If you push rates high, to manage inflation, you can stifle output growth. If that is sustained, your economy can contract! Yes, recession.
Cheaper rates result in cheaper credits, and cheaper credits improve aggregate demand (your bank can lend to you easily), stimulate production (manufacturers get lower interest rate loans), reduce unemployment (because factories are open), and support the recovery of output growth (with money in consumer purses and factories producing).
With all said, this is what I expect banks to be lending at right now:
- Lending rate from CBN: 11.5%
- Cost of deposit insurance (NDIC, etc): 0.5%
- Expenses: 2%
- Margin: 3%
- So, expect your bank’s minimum loan rate to be at least 17%
Of course, there are other sources of capital which can make it possible for banks to lend sub-17%. Typically, funds from DFIs can make that possible but those coming from CBN will be at least 17%.
The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), on Tuesday, resolved to tweak its controlling lending rate while retaining its liquidity ratio and cash reserve requirement, to make more money available for lending to critical sectors as the economy braces for a looming recession in the third quarter.
At the end of its September meeting, the MPC said the majority of its members voted to reduce the monetary policy rate (MPR) by 100 basis points, from 12.5 per cent to 11.5 per cent, while adjusting its symmetric corridor around the MPR from +200 and -500 basis points to +100 and -700 basis points.
Also, the committee decided to retain the cash reserve requirement (CRR) at 27.5 per cent and liquidity ratio at 30 per cent.