Implication of increase in MPR by CBN on companies

Recently, the Central Bank of Nigeria (CBN) increased the monetary policy rate (MPR) by 400 bps (basis points). That is a 4 percent increase. This has an impact on the cost of loans provided to companies. But that's not the only impact. In this article, we consider some implications of the increase in MPR on companies.

1. What's MPR?

This is the monetary policy rate. It is the percentage at which the CBN provides loans to commercial banks. When banks are in the form of cash, the CBN will provide this fund to them and charge the MPR percentage on the loan given to banks. In turn, the bank will have to charge their loan clients above the MPR rate.

The rate does not come handy anytime. Every quarter, the CBN monetary policy committee (MPC) meets to decide on the rate. At the meeting they deliberate on several economic issues and barometers to decide if the MPR should be increased or reduced. The general implication of the MPR adjustments is that an increase in the rate will reduce money supply while a reduction will increase money supply to the economy. 

Thereby impacting on the country's inflation level. An increase in the rate means decrease in money supply. Thereby reducing inflation. Also, reduction in MPR means increase in money supply and of course increase in inflation rate. With the recent MPC, the committee increased the rate to 22.75 percent. The aim is to reduce the money supply and reduce inflation. But it has other implications has explained below.

2. Three implication of CBN MPR on companies

2.1 Cost of borrowing

Companies with leverage may find it difficult to borrow from commercial banks. Because, the cost of borrowing will increase. This impact is more of theory than practice. Why? At high MPR, banks still lend at the same interest rate used previously. This is due to high competition. 

2.2 Penalty for tax failures

Failure to pay the required taxes by companies leads to penalty charges. The interest rate used is based on the prevailing market rate. Therefore, it is the MPR percentage that is used. With higher monetary policy rate, it implies that companies that have default in tax liability will pay more penalty charges than it was with the previous rate.

2.3 Inflation impact

Another implication for high MPR is inflation. This is, in the supply size. Higher cost of capital will force manufacturers to increase the prices of their products. Therefore, increasing the inflation rate.

3. Conclusion

From the above article, it is clear that the increase in MPR has both positive and negative implications. Although the article explains more of the negative side, the positive side was also stated. That is the reduction of the supply of money and inflation. The MPC meeting will be held in the next quarter. Do you think the CBN will increase the rate one more time? You can drop your comment below.