How interest rate affects your money

As the clock keeps ticking, Nigerians find themselves firmly held in the grip of a financial force that shows no signs of easing – interest rate. However, the impact on finances can be either positive or negative.

The current interest rate is 18.75 per cent, showing a 0.25 per cent increase compared to 18.5 percent in July 2023.

The Monetary Policy Committee of the Central Bank of Nigeria is the body that determines interest rate among other monetary policy tools.

The Monetary Policy Committee of the Central Bank of Nigeria had deferred its bi-monthly meeting scheduled for September 25 and 26, 2023 respectively due to the appointment of Mr Olayemi Cardoso and four new deputy governors of the apex bank by President Bola Tinubu. The Senate also confirmed the new appointments on Tuesday.

Expectations are high for an upward adjustment of the rate, due to skyrocketing inflation.

Historically, whenever inflation rises, the apex bank responds by raising the interest rate. The Central Bank of Nigeria employs interest rates as a tool to counteract the excess money in circulation of money.

Nigeria’s inflation is currently at 25.80 per cent, one of the biggest issues confronting Africa’s largest economy.

Financial experts noted that while raising interest rates is intended to discourage excessive spending that can trigger inflation; the CBN’s use of this measure has sometimes proven to be counterproductive.

A few weeks ago, the Director-General of Lagos Chamber of Commerce and Industry, Dr. Chinyere Almona, urged the CBN to suspend interest rate hikes.

Similarly, the Manufacturers Association of Nigeria in one of its statements obtained by the PUNCH expressed that “It is evident that the continuous and consistent increase in MPR is not yielding the desired growth in the economy.

The Impact on your finances

Does a high interest rate affect your finances? Yes. It affects both those who save and those who borrow.

However, in a nation grappling with poverty, increasing interest rates may not be the most effective solution. It affects the larger population of the country, experts say.

The National Bureau of Statistics reported that 89.8 million Nigerians fell below the poverty line at the start of 2023, with an additional four million making it 93.8 million in May of 2023.

An Economist, Dr. Aliyu Illias, told The PUNCH that CBN aims to quell inflation by making borrowing more expensive for Nigerians but raising the interest rate has proven counterproductive over the years.

He explained that the consequence of rising interest rates is often a reduction in consumer spending, as loans become more expensive, prompting people to tighten their belts.

He added that the impact of high-interest rates extends beyond investment concerns, eroding purchasing power and exerting significant pressure on people’s finances.

High interest rate also discourages investors and manufacturers from investing their money which significantly adds to Nigeria’s unemployment rate.

The National Bureau of Statistics reports that Nigeria’s unemployment rate was 4.1 per cent in the first quarter of 2023 and 5.3 per cent in the previous quarter.

In the fourth quarter of 2020, the bureau had pegged the country’s unemployment rate at 33.3 per cent.

Illias pointed out that high-interest rates discourage typical businessmen from investing at this time and would prefer to keep their money in the bank.

“This, in turn, can set off a chain reaction affecting businesses and ultimately resulting in lower economic growth.

“The CBN should focus on other variables to stimulate investment,” the economist advised.

Experts predict a persistent decline in household real income, particularly in the short term. This trend is accentuated by the elevated cost of living for those with variable-rate loans or credit card debt, potentially diminishing disposable income.

According to the NBS, the food inflation rate increased to 29.37 per cent, implying a 2.36 percentage point increase when compared to 26.98 percent the previous month.

The rise in food inflation was caused by increases in prices of bread and cereals, potatoes, yam and other tubers, fish, oil and fat, coffee, tea, and Cocoa.

A woman in her early forties, known as Iya Christiana who resides in Lagos, recently expressed her frustration over the soaring prices of food items.

She recounted her visit to the Mushin market, where she discovered that the prices of palm oil, meat, and even bread had nearly doubled.

She posed the question, ‘Where is Nigeria heading to?

The Chief Executive Officer of Postpay Africa, Ahmed Idris asserts, “We live in a time where the purchasing power of the Naira keeps sinking.”

Idris posits that while some may argue that the policy of the Nigerian government is affecting the economy adversely or whether or not there is inflation in the country, the citizens of this Nation are taking the biggest blow.

He said it would be wise to acknowledge that the events of the past months will continue. “Prices will continue to soar as exchange rates continue to fall,” Idris claims.

Similarly, the CEO of Fame Oyster, Olufemi Oyedele told The PUNCH that in a nation considered the poverty capital of the world, where the number of poor and vulnerable citizens far exceeds those who are financially comfortable, increasing interest rates may not be the most effective remedy.

He said, “Currently, we are witnessing a surge in prices, making it challenging for consumers as producers are reluctant to lower their prices.

“The economic consequence is that money appears to be in excess, and one proposed solution is for the MPC of the CBN to raise interest rates.”

Financial experts say high-interest rates are also sending shockwaves through the country’s rental market. The increased rental rates across the country are attributed to the cost of building materials and maintenance.

The PUNCH reports that the median rent for a three-bedroom apartment in Nigeria has skyrocketed to a record N750, 000.

This in-depth analysis considered rental data from 15 major cities across Nigeria, drawing from sources like propertypro.ng and estate agents.

Shockingly, in cities such as Lagos, Abuja, and Port Harcourt, the annual rent for a three-bedroom flat has soared to an astonishing N1.5 million.

On the other hand, higher interest rates can lead to higher returns on savings and investments, benefiting households that rely on interest income

Illias said that those who have the cash may decide to keep their money in the bank to earn interest and not invest.

According to him, fixed deposits, bonds, and high-yield savings accounts, high-interest rates have become more appealing, allowing them to grow their money at a faster pace.

Navigating the storm

As these financial winds blow, it’s crucial to have a game plan. Experts recommend re-evaluating the budget, considering alternative investment options, and seeking financial advice to make the most of money decisions in these turbulent times.

While high-interest rates may seem like an unyielding challenge, understanding their impact and adopting financial strategies can help weather the storm.

So, whether you’re a diligent saver or someone grappling with loans, the key is to stay informed, make informed choices, and keep a watchful eye on the ever-changing financial landscape.

Illias advises that saving money and not investing it will make it lose value every day. “Money loses its value every day, so why keep it? Since there is no foreseeable end to this financial crisis, the best option is to turn your money (cash) into a commodity or asset.”

According to the economist, every commodity will increase in price, therefore the logic behind this is that “if you have N100, 000, you should use it to buy assets or commodities, this will give you control over your wealth and probably make profits.”

He said cash is a dangerous item to hold in times like this, adding that it is ideal to invest in something that will increase cash flow or something that will at the very least regain the money when sold.

The CEO of Twelve, a digital financial wellness company for qualified investors, Tomie Balogun emphasises that sustainable wealth creation hinges on investing.

She simplifies the concept by likening it to your money working continuously, even during breaks like vacations, while you focus on your job and income generation.