• Says 14 banks cross new capital threshold
• ‘Policy shift is cautious step towards economic growth’
• 75% CRR imposed on public sector deposits
The Central Bank of Nigeria (CBN) yesterday made a U-turn on the over four-year monetary tightening that raised the benchmark interest rate from 11.5 per cent to over 27 per cent, making the first rate cut since COVID-19.
The 50 basis points cut from 27.5 to 27 per cent by the Monetary Policy Committee (MPC) of the apex bank has thrown multiple shades to different stakeholders within the economy.
First, a 50-basis-point reduction in the shedding rate has a positive consequence for the cost of borrowing, but a potential downside to capital inflow and inflation growth.
Will the cut see a reaction from the portfolio investors, who will see the action as an affront on their profit margin? They will carefully weigh the decision against interests in other markets.
For once, it is a relief to participants in the real sector as the cost of borrowing may start declining.
At the end of its two-day meeting held in Abuja, the Chairman of the MPC and Governor of the Central Bank, Yemi Cardoso, said the standing facilities corridor around the MPR was also adjusted to +250/-250 basis points and the cash reserve requirement (CRR) was also relaxed, commercial banks at 45 per cent and merchant banks retained at 16 per cent.
It maintained the liquidity ratio at 30 per cent.
The MPC’s decision to lower the policy rate reflects sustained disinflation over the past five months and projections of a further decline in inflation in the rest of the year.
The adjustment is aimed at supporting economic recovery while preserving macroeconomic stability, the CBN governor said.
Cardoso said that the adjustment of the standing facilities corridor is also intended to improve interbank market efficiency and strengthen monetary policy transmission.
The introduction of a higher CRR on non-TSA public sector deposits at 70 per cent will enhance liquidity management, he added.
“This, therefore, informed the decision to adjust the width of the standing facilities corridor to boost interbank market transactions and enhance the stability of the market. The committee acknowledged the continued stability of the foreign exchange market and its critical importance in achieving rapid disinflation and therefore called on the bank to continue the implementation of policies that would further boost capital inflows and deepen foreign exchange liquidity.
“On the financial sector, the MPC noted the continued resilience of the banking system, with most of the financial soundness indicators remaining within their respective prudential benchmarks,” he said.
On economic and financial developments, the committee expressed satisfaction with current macroeconomic conditions, citing slowing headline inflation, which decelerated for the fifth consecutive month to 20.12 per cent last month.
The gross domestic product (GDP) growth accelerated to 4.23 per cent year-on-year in Q2, up from 3.13 per cent in Q1, while the oil sector grew by 20.46 per cent in Q2, compared with 1.87 per cent in Q1.
Cardoso noted with excitement the growth of the external reserves, which equally rose to $43.05 billion (8.28 months of import cover).
Indeed, the current account surplus widened to $5.28 billion in Q2 from $2.85 billion in Q1.
He noted that disinflation has been supported by exchange rate stability, capital inflows, improved crude oil production and moderation in premium motor spirit (PMS) prices.
14 banks crossed new capital threshold, says Cardoso
CARDOSO also acknowledged the resilience of the banking system, with soundness indicators remaining strong. He revealed that there is progress in the ongoing recapitalisation exercise, with 14 banks already meeting the new capital requirement.
He, thereby, reaffirmed that the removal of forbearance measures and waivers on single obligors would strengthen transparency, risk management and long-term financial stability.
Looking ahead, Cardoso emphasised that macroeconomic stability provided room for monetary policy to further support growth.
He noted the importance of maintaining exchange rate stability, deepening foreign exchange liquidity and sustaining reforms that would bolster capital inflows and food production.
Stakeholders: Policy shift is cautious step towards economic growth
IN his reaction to the rate cut, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, commended the MPC for initiating what he described as a “significant and strategic shift in Nigeria’s monetary policy direction.”
Yusuf noted that the MPC’s decision to cut the MPR and reduce the CRR marked a deliberate move to stimulate investment, unlock credit and reposition the economy on a growth trajectory after several quarters of aggressive tightening aimed at curbing inflation.
Yusuf noted that the policy shift comes at a critical time, as the economy records five consecutive months of moderating inflation — a sign that earlier monetary tightening measures have begun to bear fruit.
With macroeconomic stability gradually being restored, he argued, the transition towards supporting growth was both logical and timely.
He observed that persistently high interest rates in recent quarters had significantly constrained access to credit in the private sector, raised borrowing costs, and stifled business expansion.
The CBN’s move to ease monetary conditions, he explained, was a clear attempt to improve liquidity, reduce the cost of funds, and make capital more accessible, particularly for sectors that are vital to job creation and output growth.
He emphasised that the reduction in both the MPR and CRR would enhance banks’ capacity to lend and bring down lending rates, thereby enabling small and medium enterprises (SMEs) to access much-needed financing.
According to him, this would not only boost private sector investment but also improve capacity utilisation and enhance productivity across the real economy.
He noted that a more accommodative monetary environment would strengthen the financial system’s role in mobilising savings and channelling them into productive investments.
The move, he said, could accelerate economic expansion and deepen financial intermediation, supporting long-term development goals.
Yusuf also lauded the MPC’s decision to impose a 75 per cent CRR on non-TSA public sector deposits, describing it as a prudent step to curb excess liquidity from fiscal sources that could destabilise the financial system.
While welcoming the monetary easing, he cautioned that fiscal policy must now rise to the occasion to fully unlock the economy’s growth potential.
He stressed the need for continued fiscal consolidation to sustain macroeconomic stability and uphold investor confidence.
Yusuf urged the government to scale up investment in critical infrastructure to lower production and logistics costs, enhance competitiveness, and boost productivity.
He added that reforms in the regulatory and institutional framework are essential to foster a more business-friendly environment, attract domestic and foreign investment, and improve the ease of doing business.
Yusuf further highlighted the urgent need to address Nigeria’s security challenges, which he declared remained a major constraint on rural productivity and private sector investment.
Besides, he pointed out that the MPC’s decision represented a well-calibrated transition from a stabilisation phase to one focused on accelerating growth.
He pointed out that if sustained and backed by complementary fiscal and structural reforms, the current measures would stimulate economic recovery, support job creation, improve private sector performance, expand the tax base and deliver more sustainable inflation control in the medium to long term.
Also, a former president of the Chartered Institute of Bankers of Nigeria (CIBN), Dr Uche Olowu, described the decision of the CBN and its MPC to ease monetary policy as a welcome development.
Olowu said the move signaled a thoughtful shift towards balancing inflation control with economic growth.
He noted that with inflation on a downward trend, it was only natural for the monetary authorities to begin recalibrating their policy stance.
He stated that the latest policy moves, which saw the MPR cut by 50 basis points and the CRR reduced by 500 basis points, reflected growing confidence that ongoing economic reforms were beginning to yield results.
He expressed that the decision represented a cautious, but deliberate step by the CBN to maintain price stability while simultaneously directing attention towards stimulating real economic activity.
According to him, monetary easing should help unlock more lending to the real sectors of the economy, particularly those that support manufacturing and industrial production.
By doing so, the banking system, he argued, would be better positioned to channel credit to productive sectors, thereby supporting growth, job creation, and increased output in the months ahead.
An Independent investor, Amaechi Egbo, said the CBN’s recent decision to cut the MPR and lower the CRR was more than a routine monetary adjustment.
According to him, the apex bank was beginning to shift from a strict focus on inflation control towards a more balanced approach that considers the pressing need for economic growth.
Egbo noted that the combination of a lower MPR and reduced CRR suggested a softer interest rate environment in the near term.
He believed this could result in marginally lower borrowing costs for businesses and consumers, as banks would have more liquidity to extend credit.
However, he warned that the policy rate remained relatively high at 27 per cent, noting that banks may continue to adopt a risk-averse approach due to lingering economic uncertainty and elevated credit risks.
“Borrowing costs may not fall dramatically, but the move provides some relief, especially for Small and Medium-sized Enterprises (SMEs) that have struggled under tight credit conditions,” he added.
On the potential impact on capital inflows, Egbo said the decision could produce a mixed outcome.
While lower rates typically reduce the appeal of local assets to foreign investors seeking high yields, Nigeria still offers one of the most attractive nominal rates in the emerging market space, he said.
He noted that investor sentiment would depend more on the central bank’s ability to maintain exchange rate stability and rebuild confidence in the foreign exchange market.
“Foreign portfolio investors are looking for both returns and macroeconomic stability. If this cut is seen as part of a coherent strategy to stabilise the naira and support recovery, it could actually improve sentiment,” Egbo said.
Addressing inflation, which remained well above the CBN’s target, Egbo acknowledged the risk of further price pressures.
However, he opined that Nigeria’s inflation was largely supply-side driven, stemming from structural issues such as foreign exchange volatility, high energy costs, and disruptions in the agricultural value chain.
“In that context, the CBN’s decision to loosen policy may be aimed at stimulating domestic production. By improving access to credit and lowering the cost of funds, they may be hoping to address some of the underlying supply constraints,” he said.
