1. THE NEXUS BETWEEN MPR AND
CORPORATE PERFORMANCE
PUBLISHED BY:
RASHEED OTTUN

2. WHAT IS MPR ?
• MPR is the Monetary Policy Rate.
• It is the official interest rate that is set by the Monetary Policy
Committee (MPC)
• It is also called the bench mark interest rate or baseline interest rate.
• The Monetary Policy Committee (MPC) is the committee that is
inaugurated to set the interest rate independence of the department
of finance.
• The inauguration of the MPC is a way to ensure central bank’s
independence from government in control (use) monetary policy.

3. WHAT IS THE ROLE OF THE MPC
• The role of the Monetary Policy committee is to:
i. Review economic and financial conditions in the economy
ii. Determine appropriate stance of policy in the short to medium
term
iii. Review regularly, the CBN monetary policy framework and adopt
changes when necessary.

4. WHY SET AN OFFICIAL INTEREST RATE
• The Central Bank is responsible for the conduct of monetary
policy.ate The conduct of which is focused on the management of
money supply and interest rate.
• The central Bank sets interest rates in order to achieve:
i. Price stability
ii. maintain overall economic growth f
iii. Full employment
iv. Balance of payment equilibrium

5. DEMAND FOR MONEY
• The demand for money refers to the desire to hold money .i.e. to
keep your wealth in the form of money, rather than spending it on
goods and services or using it to purchase financial assets such as
bonds or shares. It is usual to distinguish three reasons why people
want to hold their assets in the form of money.

6. HOW IS THE MPR SET ?
• The central bank sets interest rate though its conduct of monetary
policy. The conduct of monetary policy lies on the management of
money supply and interest rate.
• The MPR is set through the interplay of money demand and money
supply.
• Money Demand is the desire to hold money.
• Money supply is the stock of money in the economy.
• The central Bank is solely in control of money supply. When the Central
Bank targets a level of MPR, it either adopts an expansionary or
contractionary monetary policy (.i.e. either increase or decrease the

7. KEYNESSIAN LIQUIDITY PREFREFENCE
FRAMEORK OF MONEY DEMAND
• It is a model developed by JOHN MAYNARD KEYNES that predicts
equilibrium interest rate on the basis of supply of and the demand
for money.
• Keynes assumes that there are two main categories of assets that
people use to store their wealth: money and bonds.
• There is an opportunity cost for holding any of the two assets. The
opportunity cost for money demand is the interest (return ) on
bonds .

8. MOTIVE FOR HOLDING MONEY
• According to the Keynes’s analysis, there are three main motives behind the
demand for money.
THE TRANSACTIONS MOTIVE:
• Money being a medium of exchange, is required for conducting daily
transactions.
THE PRECAUTIONARY MOTIVE:
• The desire to hold money in order to meet unforeseen or unexpected
circumstances.
THE SPECULATIVE OR ASSETS MOTIVE:
• The desire to hold money in order to purchase financial assets such as
bonds, shares etc and other speculations. This motive explains how speculation
about interest rates would affect money demand.

9. The Transactions And Precautionary
Demand For Money: L1
• The transaction Demand for money is determined primarily by the
level of transaction. And the level of transaction is proportional to
income.
• The precautionary demand for money is primarily determined by
the level of transaction people expect that they will carry out in
future and that transactions are proportional to income.
• The transaction and the precautionary motive for holding money
are called ACTIVE BALANCE (L1 ). i.e. the money held for transaction
and precautionary purpose.

10. DETERMINANTS OF L1
LEVEL OF TRANSACTION :
• As the economy expands and income rises, people will want to carry out
more transactions using money and as a result their desire to hold more
money rises. Thus, The bigger people’s money income, the greater their
expenditure and the bigger their demand for active balances.
• Liquidity preference is the desire to hold asset in the form of cash
(money)
• L1 = F(Y)
Where:
L1 = liquidity Preference, which is the sum of transactions and precautionary

11. SPECULATIVE DEMAND FOR MONEY
L2
• The speculative demand for money balances is termed L2.Money
balances held for this purpose are called idle balances.
• The speculative demand for money (L2) depends on the rate of
return on assets and on anticipations about future movements in
security prices (and hence their rate of return) and future
movements in exchange rates.
• There is an inverse relationship between the interest rate and L2 .

12. DETERMINANT OF THE L2
THE RATE OF INTEREST (OR RATE OF RETURN) ON ASSETS:
• The higher the rate of return on assets, such as shares and bonds, the
greater the opportunity cost of holding money and therefore the
lower the speculative demand for money.
THE FUTURE MOVEMENT IN EXCHANGE RATE:
• Expectations about changes in the exchange rate are a major
determinant of the speculative demand for money. The more quickly
is the exchange rate expected to rise in favour of a currency, the more
will people want to hold that currency.
• L2 = F(i) where i = Nominal interest rate

13. MONEY SUPPLY
•
• The Central Bank directly controls the monetary base. That is, it is
exogenously determined.
• The other measures of the money stock are determined by the
interaction of the monetary base with the banking sector:
 regulatory requirements
 the incentive of financial institutions to have enough funds on
hand to satisfy depositors’ demands

14. • Besides the monetary base (H), there are other definitions of the
money stock such as
 M1 (currency, current accounts, travelers checks)
 M2 (M1 plus savings accounts, small term deposits, money held
in money market accounts)
 M3 (M2 plus large term deposits and institutional money
market balances)

15. EQUILIBRIM INTEREST RATE

16. MONETARY POLICY
• These are deliberate efforts made by monetary authorities to
control the volume, cost and the availability of money and credit in
the economy .
• The essence of the conduct of monetary policy is to control the
quantity of money in circulation in the economy so that the Central
Bank can achieve price stability, economic growth and reduce
unemployment.
• The central bank enjoys the autonomy in the conducts of the
monetary policy. Depending on the goal it intends to achieve, it can
either control money supply or the interest rate but cannot use

17. MONETARY
INSTURMENTS/TECHNIQUES
• The various monetary instruments (techniques) are:
Market Based (indirect) Techniques/ Traditional Monetary Instruments
– Open Market Operation
– Discount rate Policy
– Reserve Requirement.
Non-Market base Technique:
– Supplementary Reserve Requirement
– Variable Cash Ratio
– Variable Liquidity Ratio
– Credit ceiling
– Selective Control
– Moral Suasion

18. EXPANSIONARY MONETARY POLICY
• Expansionary Policy are the deliberate
attempt taken by the central Bank to
reduce the interest rate by increasing
the quantity of money in circulation.
• In this case the central bank fixed MPR
(interest rate) by increasing the money
stock .
• By changing the interest rate , the
Central bank tries to achieve maximum
employment, stable prices and a good
level growth

19. CONTRACTIONARY MONETARY POLICY
• Expansionary Policy are the
deliberate attempt taken by the
central Bank to increase the
interest rate by decreasing the
quantity of money in circulation.
• In this case the central bank fixed
the MPR (interest rate) by raising
the money stock using any of the
monetary instruments at its
disposal.

20. MPR AND BUSINESS BORROWING
• MPR directly influences business borrowing. Businesses often need to
take out short term loans to make up for shortfalls in payroll or other
expenses. When the central bank raises the MPR, all other short-term
interest rates rises and as a result, higher interest rates make such
shortfalls more costly, since the businesses will have to pay more
interest back to lenders. Companies also frequently take out longer
term debt for improvements and infrastructure. A raise in MPR also
causes the long-term rates to rise. The higher the prevailing interest
rates, the more costly it is to take debt and therefore the less likely
businesses will be able to commit the funds to such projects.

21. MPR AND BUSINESS STRATEGY
• The ultimate goal of businesses is to make profit. Therefore, it is very
important that before businesses consider another venture, thorough
analyses of the ultimate prospects of profit generation of the venture must
be considered. The venture’s prospects must also be compared to other
possible (alternative) sources of revenue. Saving the capital to be ventured
at current interest rate is another possible (alternative) source of
revenue, there is the tendency that a higher interest rate can make ventures
less attractive. For instance, if a cost benefit analysis shows that a new
program within a company is likely to yield a profit of 4% per year for all
money put into the program, but the prevailing interest rates are 6%, the
company is better off putting their money in the bank. In this way, interest

22. THE MPR AND STOCK PRICES
• It affects the ability of businesses to raise capital through stock and the
value of stock prices. When a company goes public, it sells shares of the
company in the form of stock to raise capital. Subsequently, the implied
value of the business is tied to the share price of the stock, and share price is
tied to demand for the company's stock. When interest rates are higher, the
demand for investment tends to be lower, so higher interest rates are
generally detrimental for company's stocks, and their ability to raise money
through a stock offering. The reason higher interest rates are bad for stocks
is that higher interest rates make traditional saving more attractive; if
someone can earn a 5% guaranteed return by saving at a bank, they will be
less likely to risk money investing, than if they could only earn 1 or 2% in a
savings account.

23. MPR AND PROFITABILTY
• As the Central Bank lowers or raises the MPR, banks need to adjust
the rates that they charge their customers when they
lend funds or pay their customers on deposits.
• The rates charged and the rates paid can certainly have an affect on
the profitability of a business.
• As the MPR changes the interest rate on variable rate ( adjustable
rate ) loan changes.

24. • For a business with variable-rate loan, a rise in MPR, raises the interest
rate on such loan and the business will pay more interest rate charges on
the loan as a result. Consequently, the profitability of the business
declines. It becomes very worrisome, when the earnings from the
investment cannot cover the interest rate charges on the loan. On the
other hand, if the Central Bank decides to loosen up i.e. reduce MPR, the
interest rate charged on such loan will fall and the interest rate payment
on such loans will reduce and the profit of the business will rise, all things
being equal.

25. • Also, when Central Bank cuts the official interest rate, companies
get loans at lower interest rates. When official interest rate goes
up, it costs them more to borrow money. This affects overhead
costs. And it means that companies' profits are affected. So if
interest rates go down, the thought is that companies will spend
less money and therefore have higher profits. This invites investors
to put their money in the stock market, and it raises the market
values. Interest rate hikes, on the other hand, can have an opposite
effect in some cases.

26. MPR AND CORPORATE PERFORMANCE
NEXUS
• Whenever the central Bank sets monetary policy rate by adjusting
short-term interest rates, which changes other short-term and long-
term rates, such as bank loan. Interest rate changes affect
businesses directly through interest costs and indirectly .
• MPR directly affects the cost of borrowing of corporations which in
turn affect their spending i.e. investment.
• MPR affects the business strategy of businesses as a result changes
in the cost of borrowing and possible returns that could be derived
from the alternative sources that funds can be put to.

27. • MPR affects the ability of businesses to raise capital in the loanable
funds market and the value of the stocks of businesses as a result of
changes in profitability of the companies.
• The price of stock must also reflect the market interest rate. As a
result, for any change in the interest rate the price of stocks change.