Market News

Rationale behind cut

The CBN Governor Olayemi Cardoso, while disclosing the committee’s decision at the conclusion of the bank’s two-day, 307th Monetary Policy Committee (MPC) meeting, held from 21 to 22 September in Abuja said thr decision followed two consecutive retention of the Monetary Policy Rate (MPR) at 26.5 per cent, holding it in May and July previously, following a 50-basis-point reduction in February from 27 per cent.

Speaking after the meeting, the CBN Governor stated that the committee decided to reset the MPR and recalibrate the policy corridor as an important operational realignment aimed at strengthening monetary policy transmission.

“The committee decided to reset the MPR and recalibrate the policy corridor as an important operational realignment aimed at strengthening monetary policy transmission and reinforcing the primacy of the monetary policy rate.

“It emphasised that the recalibration of the corridor does not constitute a change in the current monetary policy stance, but rather an operational reset to enhance the effectiveness of monetary policy and support the transition to an inflation targeting framework,” CBN said.

The MPC also adjusted the asymmetric facilities corridor around the MPR to +50/-300 basis points, a move aimed at discouraging banks from keeping idle funds with the CBN and encouraging increased lending into the economy.

Furthermore, the committee maintained the Cash Reserve Ratio (CRR) for commercial banks at 45 per cent, retained the rate for merchant banks at 16 per cent, and kept the CRR on non-TSA public-sector deposits at 75 per cent for liquidity management considerations.

CBN cut the interest rate amid its continued efforts to moderate Nigeria’s headline inflation.

Since CBN maintained the rate in May, inflationary pressure has generally eased, with headline inflation standing at 15.39 per cent in August, down from 15.43 per cent in July, 15.91 per cent in June and 15.93 per cent in May, according to the National Bureau of Statistics (NBS).

The rise in inflation recorded in April followed the escalation of the Middle East conflict, which began in February and contributed to higher global oil prices.

But Yusuf stated that the decision signals an important rebalancing of monetary policy towards supporting growth, investment and economic recovery, while preserving price and financial-system stability.

“The review of the asymmetric corridor around the MPR from +50/-450 basis points to +50/-300 basis points further reinforces the recalibration of the monetary policy architecture.

“The CPPE considers the adjustment timely given the improving inflation trajectory and the growing costs of an excessively restrictive monetary environment.

There had also been a widening misalignment between the MPR of 26.5%, inflation of about 15.4%, and prevailing money-market rates of around 20%. This weakened the signalling function of the policy rate and raised concerns about the effectiveness of monetary policy transmission.

“The reduction of the MPR to 23% should therefore be viewed not merely as monetary easing, but as an important realignment of the policy rate with prevailing macroeconomic and financial-market conditions.

“The decision is particularly positive for the real sector, where high financing costs have become a major constraint on investment, production, working capital and job creation. For many businesses, commercial lending rates have remained at levels that are difficult to reconcile with productive investment, particularly in manufacturing, agriculture, construction, logistics and other sectors with relatively long investment cycles and tight margins.

“The policy adjustment therefore offers an opportunity to reduce the cost of capital, improve business cash flows, stimulate investment and strengthen the productive capacity of the economy,” he explained

He however stated that the ultimate economic value of the decision will depend on transmission.

“The CPPE expects banks to reflect the new monetary policy environment in the pricing of credit. Lending rates on both new and existing facilities should progressively adjust downwards. Without meaningful transmission to borrowers, the impact of the policy adjustment on investment and economic growth would be limited,” he further highlighted.

Also speaking, the Director of the Institute of Capital Market Studies and President of Capital Market Academics of Nigeria, Prof. Uche Uwaleke said the MPC decision to cut the MPR by 350 basis points is justified by moderating inflation, exchange rate stability, improvement in Fx market liquidity, and accretion to external reserves.

“It is a welcome development against the backdrop of the recently signed MoU between the Minister of Finance and the CBN Governor on fiscal and monetary policies collaboration,” he added.

Okeke: Why 350bps cut may not translate to cheaper loans

Economist, Dr Marcel Okeke has criticised the Monetary Policy Committee (MPC) for what he described as an “unprecedented” 350-basis-point reduction in the Monetary Policy Rate (MPR), saying the move may not necessarily translate into cheaper credit for businesses and consumers.

Speaking on the decision, Okeke expressed surprise at the scale of the reduction, comparing it with the more gradual adjustments typically made by major central banks.

“For them to come down from 26.5 to 23, we’re moving 3.5 straight away. This is a political error. I’m surprised. Very, very surprised at that kind of quantum drop. It’s unprecedented,” he said.

Okeke also questioned the possible connection between the rate cut and the recent Memorandum of Understanding (MoU) between the Central Bank of Nigeria (CBN) and the Ministry of Finance.

According to him, the agreement may be part of a broader attempt by the monetary and fiscal authorities to harmonise their policies after operating largely in silos.

“My suspicion is that this kind of quantum drop is part of the outcome of the memorandum of understanding,” he said.

“Some of the things in the fiscal side are counterpoints or counteract what has been happening in the monetary authority side. That’s what has been happening. So all of a sudden, they now realise they have to harmonise,” Okeke said.

However, he said the rate cut could be viewed as an outcome of the new understanding between the two authorities, while questioning whether the reduction alone would achieve the desired impact on lending.

According to him, lower interest rates do not automatically guarantee increased access to bank credit because lenders consider several other factors when approving loans.

“It’s not only interest that banks consider when they want to give their loans. It’s not only interest,” he said.

Okeke further argued that the broader business environment must also become more conducive for the benefits of monetary easing to be fully realised.

“When you talk about business, it’s not all about finance. The entire business environment in Nigeria is not enabling,” he added.

Also, analysts at Cowry Asset Management Firm said, “Overall, the latest decision marks a notable shift in the CBN’s monetary policy direction, with the 350bps reduction in the MPR representing a significant easing of financial conditions as the Bank seeks to balance price stability with supporting economic activity.”

Suleyman A Ndanusa PhD OON, a former CEO of the Security and Exchange Commission (SEC), said, “The greatest potential benefit of this decision is that it could begin to reduce the cost of borrowing, ease government debt service pressures and gradually restore breathing space to businesses and households. A 350 basis point reduction from 26.5% to 23% is not a mild adjustment; it is a decisive policy reset and a clear signal that the CBN is beginning to shift from emergency stabilisation towards supporting productive activity.

The package, however, is more cautious than the headline suggests. The CBN has reduced the price of money but retained the formidable CRR barriers: 45% for deposit money banks, 16% for merchant banks and 75% on non-TSA public sector deposits. In simple terms, the Bank has loosened the interest rate brake while keeping a firm grip on the liquidity handbrake. Therefore, cheaper credit to businesses may not arrive automatically or quickly.”