Decoding the MPC: What CBN Decisions Actually Mean for Your Wallet
Every couple of months, headlines appear saying things like:
“MPC retains MPR at 26.5%.”
Most people read it, nod politely, and move on.
But hidden inside that one sentence is a decision that affects you in significant ways.
First, what do they mean and how do they impact you and me?
Let’s start with what the CBN, and MPC is and what they do.
The CBN
The Central Bank of Nigeria, is the apex bank which was established by the Central Bank Of Nigeria Act,2007.
The principal objectives of the bank as stated in the Act are to:
ensure monetary and price stability;
issue legal tender currency in Nigeria;
maintain external reserves to safeguard the international value of the legal tender currency;
promote a sound financial system in Nigeria; and
Act as banker and provide economic and financial advice to the Federal Government.
The CBN is also charged with the responsibility to administer by the Banks and Other Financial Institutions Act (BOFIA),2020 with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities, as well as the promotion of an efficient payments system.
Basically, this means anything related to banking and financial institutions is under the purview of the CBN. But for the purpose of this article we’d limit it to the monetary aspect of the bank.
Monetary Policy Committee (MPC)
The MPC is also established by the same act, with the aim to facilitate the attainment of the objective of price stability and to support the economic policy of the Federal Government by formulating monetary and credit policy. (CBN Act 2007).
It goes further to constitute the members of the committee as follows:
The MPC shall consist of :
the Governor of the Bank who shall be the Chairman;
the four Deputy Governors of the Bank;
two members of the Board of Directors of the Bank;
three members appointed by the President; and
two members appointed by the Governor.
Now it is clear what the CBN, and MPC is and what it does.
How does the MPC work?
The members of the MPC will convene at least four times in a year. The outcome of said meetings, are made publicly available. The MPC also submits periodic reports of its meetings and activities to the Board of Directors of the Bank.
The MPC meets to discuss how they’d use instruments in their toolkit to influence the direction of short term interest rates, money supply and credit as a means of achieving price stability, low unemployment, balance of payments viability and economic growth.
At the end of a two-day MPC meeting, the decisions are announced. These decisions usually come down to whether to adjust and by how much (to tighten or relax) or maintain the rates depending on inflation and economic conditions.
What are the Monetary Policies?
Monetary Policy refers to the specific actions taken by the Central Bank to regulate the value, supply and cost of money in the economy with a view to achieving government’s macroeconomic goals.
Instruments in the Monetary Toolkit
These are the tools the CBN uses to influence money supply, credit, and interest rates in the economy.
The major instruments are:
Monetary Policy Rate (MPR)
Standing Facilities Corridor around the MPR and;
Cash Reserve Requirement (CRR)
Other CBN instruments in its tool kit to influence the supply of money are:
Open Market Operation (OMO)
Exchange Rate
Moral Suasion
Prudent guidelines
The Monetary Policy Rate: this is the interest rate at which banks can borrow from the apex bank. This is the base rate, as other lending activities are anchored on this rate and guide the interest rates across the economy. It acts as a benchmark for lending and borrowing decisions, helping to manage inflation and stabilise economic growth.
Standing Facility Corridor (the asymmetric corridor): this is the range set by the CBN where interest rates can fluctuate in the short term. It is divided into an upper bound and a lower bound.
For MPR of 26.5%, the upper bound is 27% and the lower bound is 22%.
The upper bound denotes the rate at which banks can borrow from the CBN, and the lower bound indicates the rate at which banks can deposit money with the CBN.
The asymmetric corridor gives the CBN flexibility in borrowing and lending to the banks.
Cash Reserve Requirement: This is a percentage of the deposits banks receive that the CBN requires for them (the bank) to keep and not lend out. This means the higher the reserve requirement, the lower the amount banks can lend out to people and businesses.
So at 45%, banks are required to keep N45 for every N100 deposit they receive.
Open Market Operation: CBN on behalf of the Federal government, buys and sells securities to the banks, and the general public (open market). When the CBN sells securities, it reduces the supply of reserves and when it buys (back) securities-by redeeming them-it increases the supply of reserves to the Deposit Money Banks, thus affecting the supply of money.
The definition of money supply and its interpretation will be discussed in a subsequent article.
In summary, the actions of the CBN via its monetary policies are to achieve one of its mandates (ensure monetary and price stability). However, these actions are achieved by increasing or decreasing the supply of money in the economy.
But how do these affect you and me?
Any action by the CBN to adjust the supply of money in the economy affects us because money is a medium of exchange and changes in its demand relative to supply, necessitate spending adjustments.
So, the higher the supply of money, the more money tends to be spent, therefore money moves faster. As more is spent, the cost of goods and services rises, which contributes to inflation.
So when there is a rapid increase in the cost of goods and services in the economy, the CBN can decide to reduce the supply of money via any or all of the instruments in its toolkit.
This can be through increasing the MPR, increasing the cash reserve requirement, and also selling more securities to the banks and the public. By doing so, it reduces the money in circulation, thus reducing the velocity of money and influencing how money is spent.
On the other hand, a decrease in the supply of money means it moves slower, and hence less spending.
If the economy is not growing, the CBN can stimulate the economy, i.e increase the supply of money so that money can move faster, therefore more economic activities can take place. The CBN will decrease the MPR, reduce the cash reserve requirement, and also buy securities from the banks and the public. By doing so, it increases the money in circulation, thus increasing the velocity of money and influencing how money is spent.
What Does this actually look like in Real Life
If the aim of the CBN is to stimulate the economy, the CBN can cut the rate say by 200bps. So the MPR is now 24.5%. It can also reduce the CRR to 30%. With these two adjustments, it means:
Banks can lend money from the apex bank at a lower interest rate, which means they can also lend out at a lower interest rate. Lower interest rates encourage more borrowing, so businesses and people borrow more. This makes money (supply) available for economic activities.
With a decreased CRR, it means that banks will be able to lend out more (volume) since they’d be able to lend out N70 for every N100, as against N55 for every N100. This also achieves the same objective of increasing the amount available in circulation.
When interest rates are lower, businesses borrow money, and can finance projects cheaper, therefore, economic activities increase, which leads to the growth of the economy.
Think of this as a business; would you rather borrow money from the bank when the interest rate is 28% or when the interest rate is 25%. You’d want to borrow when it is lower, at 25%.
A direct effect of this is that prices of goods and services will also rise, which is inflation. However, central banks usually have a target or a range of how fast the prices of goods and services can rise.
If the increase is very fast, the CBN can reduce the supply of money by doing the opposite, increasing the interest rates, and also increasing the cash reserve requirement. They can also begin to sell securities with the aim of mopping up liquidity.
Now think of this as an investor, when rates are higher, it means you’d get higher interest on the money you save. You are more likely to save than spend, if the rates you get on your deposit or Money Market instrument is 18-20% than at 12-15%.
So the next time you see “MPC retains MPR at 26.5%”, you’re no longer reading a technical announcement. You’re seeing a decision that affects borrowing costs, business activity, savings returns, and ultimately how expensive life becomes.