In 10 minutes we will be looking at how Consumer interest rates charged by banks on loans are directly affected by CBN bank rate otherwise known as Monetary Policy Rate (MPR). We will attempt to define the different types of rates and how they relate to consumer interest rates.
As defined by investopedia “… is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is method by which central banks affect economic activity. Lower bank rates can help to expand the economy by lowering the cost of funds for borrowers, and higher bank rates help to reign in the economy when inflation is higher than desired”.
Bank rate is also referred to as Discount Rate or MPR.
Investinganswers.com defines Interbank rates as”…rates on short-term loans between banks. Banks that have extra cash on hand can make a little money by lending to another bank. The interest rate that the lending bank charges is called the interbank rate.
The interbank rate is also similar to Overnight Rate which is the rate a banks charges another for funds made available overnight. The borrowing bank borrows such fund to meet up with the their reserve requirement.
Bank Reserve Requirement or Cash Reserve Ratio (CRR) is a percentage of the banks deposit liabilities that are supposed to be kept in reserve. Thus banks borrow money overnight to meet up with such requirement if they don’t have enough and the rate other banks charged for such borrowing is called overnight rate.
A high bank rate will push banks to rely on interbank and overnight rate to meet up with reserve requirement and short fall in deposit in the immediate time and vice versa.
Consumer Interest Rates:
Wikipedia defines Consumer Interest Rate as “A type of interest that is charged for personal loans, including automobile loans and credit card debt. This type of interest constitutes all forms of nondeductible interest that consumers must pay…”.
Bank rates or MPR has a strong effect on consumer interest rates just as it does on interbank and overnight rate. Banks charge with a margin, the bank rate, interbank rate, treasury bill rate and interest on fixed and savings accounts forms the base for bank to decide what they charge on consumer loans.