By Spear News Nigeria
The Central Bank of Nigeria has lowered its benchmark interest rate to 23 per cent from 26.5 per cent, a reduction of 350 basis points that could ease borrowing costs for businesses and households across the country.
The decision was taken by the Monetary Policy Committee at the end of its two-day meeting in Abuja, and announced by the CBN Governor, Olayemi Cardoso.
It is the largest single cut to the Monetary Policy Rate since 2006, and it follows three consecutive months of declining inflation. Headline inflation eased to 15.39 per cent in August from 15.43 per cent in July.
Cardoso said the decision was driven by improved macroeconomic conditions, including stronger output and broad-based disinflation.
“The simultaneous moderation across major inflation components provides stronger evidence that underlying price pressures are easing rather than reflecting temporary movements in individual components,” he said.
The committee also recalibrated the Standing Facilities Corridor to +50 and -300 basis points around the new MPR, placing the Standing Lending Facility at 23.5 per cent and the Standing Deposit Facility at 20 per cent.
The Cash Reserve Requirement was retained at 45 per cent for deposit money banks, 16 per cent for merchant banks, and 75 per cent for non-TSA public sector deposits.
The central bank said the recalibration was intended to close the gap between the policy rate and prevailing market rates, which had weakened the transmission of monetary policy decisions to the real sector.
“There is a clear disconnect between CBN’s Monetary Policy Rate and effective market rates. The MPR was 26.5 per cent while the interbank rate stood around 22 per cent,” Cardoso said.
“The MPR became the de jure rate with the SDF rate as the de facto.”
Cardoso stressed that the move should not be read as a change in the CBN’s monetary policy stance, describing it as a recalibration to restore the MPR as the principal signal of monetary policy as the apex bank transitions towards an inflation-targeting framework.
“We have a firm belief that it is not working as effectively as it should,” he said of the transmission mechanism.
“The rates at which the interbank is working are disconnected from the MPR. And there’s a need to fix that.”
The decision comes amid divergent global monetary policy trends. Both the United States Federal Reserve and the European Central Bank recently raised their anchor rates, narrowing Nigeria’s interest-rate advantage and potentially testing the resilience of recent gains in the foreign exchange market.
Analysts have warned that the steep cut could fuel asset price bubbles and complicate the outlook for capital inflows. However, with external reserves at an 18-year high of $55.25bn, some believe the country has sufficient buffers to absorb short-term pressures.
For businesses that have endured elevated financing costs during the CBN’s tightening cycle, the critical question remains whether the reduction in the benchmark rate will translate into significantly cheaper commercial lending.
The MPR is the rate at which banks borrow from the CBN, not the rate at which they lend to customers. The final cost of credit also reflects banks’ funding costs, risk assessments, operating expenses, collateral requirements and expectations about inflation and the exchange rate.
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