When the Central Bank of Nigeria (CBN) cut interest rate last week, it did so against the background of easing inflation and rising bank liquidity, but the decision means much more for the economy, COLLINS OLAYINKA and ISAAC CHIBUIFE report.
The Central Bank of Nigeria’s Monetary Policy Committee (MPC), last week, delivered what many analysts describe as a watershed moment in Nigeria’s monetary policy landscape, cutting the benchmark monetary policy rate (MPR) by 50 basis points to 27 per cent. This decision marked the first rate reduction since 2020, signalling a cautious but decisive shift from the aggressive stance that has characterised the bank’s approach under Olayemi Cardoso’s leadership.
The rate cut came against a backdrop of encouraging macroeconomic indicators that have provided the MPC with the confidence to begin an easing cycle. Headline inflation had decelerated significantly to 20.12 percent in August 2025, representing the lowest level since April 2025 and a marked improvement from the peak level witnessed some time last year when the headline inflation was heading to 40 per cent.
The sustained disinflation trend, coupled with relative stability in the foreign exchange (FX) market and robust external reserves, which have climbed to a level not seen in several years, has created the policy space necessary for monetary accommodation.
The rate cut represented a calculated balancing act between maintaining price stability and fostering economic growth. For over a year, the CBN had maintained the MPR at 27.5 per cent since November 2024, prioritising the anchoring of inflation expectations over accommodative lending policies. However, the consistent moderation in inflationary pressures has now tilted the policy calculus toward supporting economic expansion.
Financial market analysts had anticipated the move, with Bloomberg surveys indicating a median expectation of a 50-basis point reduction among economists. The unanimous nature of the decision, as reflected in the MPC’s communiqué, suggested strong confidence among committee members in the sustainability of the disinflation trajectory and the economy’s underlying resilience.
Implications for economic growth
The rate cut is expected to catalyse economic growth through multiple transmission channels. Lower interest rates should reduce borrowing costs for businesses and consumers, potentially spurring increased investment in productive sectors and consumer spending. This is particularly crucial for Nigeria’s manufacturing sector, which has faced significant headwinds from high production costs and limited access to affordable credit.
Small and medium-scale enterprises (SMEs), which form the backbone of Nigeria’s economy and employ millions of Nigerians, stand to benefit significantly from improved access to credit. The reduced cost of funds should encourage banks to expand lending to this critical sector, potentially accelerating job creation and economic diversification efforts.
The agricultural sector, identified as a key driver of the government’s food security agenda, could see renewed investment as farmers and agribusiness operators gain access to more affordable financing. This could help address some of the structural factors that have contributed to food inflation, creating a virtuous cycle of increased production and price stability.
The real estate and construction sectors, which are highly sensitive to interest rate movements, may experience renewed activity as mortgage rates decline and property developers find it more viable to undertake new projects. This could have significant multiplier effects across related industries, from building materials to financial services.
The immediate impact on Nigeria’s capital markets has been mixed, reflecting the complex interplay of factors that influence investor sentiment. While fixed income markets responded positively to the rate cut, with treasury bill yields retreating across all tenors, equity markets initially showed some volatility.
The all-share index experienced a minor decline of 0.4 per cent in the immediate aftermath of the announcement, closing at 140,929.6 points with market capitalisation decreasing to N89.198 trillion.
The initial reaction, however, may not reflect the longer-term positive implications of the policy shift for equity valuations.
Capital market experts suggest that the rate cut should ultimately prove beneficial for equity markets through several channels. Lower interest rates typically reduce the opportunity cost of holding equities relative to fixed income securities, potentially driving a rotation of funds from bonds to stocks. Additionally, companies with significant debt burdens should see their borrowing costs decline, improving profitability and the outlook of the companies.
The banking sector, which has benefited from high interest rates in recent times, may face some headwinds as net interest margins compress. This could be offset by increased loan demand and lower provisioning requirements as economic conditions improve.
Consumer goods companies and other domestic-focused businesses should see improved earnings prospects as lower rates boost consumer spending power. The telecommunications, food and beverages and retail sectors are expected to emerge as particular beneficiaries of this monetary easing cycle.
Nigeria’s decision to cut rates comes as the country positions itself as the last of Africa’s big four economies to embrace monetary easing. South Africa, Kenya and Egypt have already embarked on easing regimes, reflecting continent-wide trends toward more accommodative monetary policies as inflationary pressures moderate.
This regional context is significant as it suggests a broader continental shift in monetary policy stance, driven by similar macroeconomic fundamentals. The regional easing could enhance regional trade and investment flows, particularly given Nigeria’s position as one of the region’s largest economies and most populous countries.
The rate cut also aligns with global monetary trends, as central banks worldwide reassess their policy stances in response to evolving economic conditions. This global synchronisation could support foreign portfolio investment flows into Nigeria, particularly as the country’s improved macroeconomic fundamentals gain attention.
But despite the positive implications of the rate cut, several challenges remain that could influence the effectiveness of the policy shift. Inflation, while declining, remains significantly above the CBN’s target range, suggesting that the fight against price pressures is far from over. Hence, some analysts have called for careful monitoring of inflation expectations to ensure that the rate cut does not undermine the hard-won gains in price stability.
The foreign exchange market, while more stable than in previous periods, could be tested, especially as the country heads into election season. The success of the monetary easing cycle may also depend significantly on the government’s ability to address these structural issues through fiscal policy and economic reforms to reduce distortion.
Rate cut as a balancing act
The rate cut signals a shift in the delicate balance the CBN must maintain between controlling inflation and supporting growth.
After the MPC announced its decision, market participants reported a surge of about N1.15 trillion into the system’s liquidity. This pushed total excess liquidity to approximately N3 trillion. The overnight lending rate reportedly fell about 100 basis points to around 25.5 per cent as banks adjusted to the CBN’s new interest rate corridor.
This excess liquidity both provides opportunities and pressures the CBN to act. Foreign exchange reserves and tightened foreign exchange management had, by mid-2025, reduced market panic and narrowed the gap between official and parallel markets, enabling a more confident approach to supporting growth.
Analysts supporting the cut argued that the deflation already presented a strong case for a reduction. The MPC explained that a declining inflation outlook alleviates some urgency on the ‘hawkish’ side of policy, enabling the Central Bank to support growth without immediately compromising price stability.
They observed that Nigeria, despite being Africa’s largest economy by population, has faced challenges such as insufficient private investment, weak industrialisation, and subdued credit growth. Lowering the interest rate is seen as a path to reducing borrowing costs, encouraging business expansion and stimulating consumption.
This sentiment aligns with the Chief Executive of the Centre for the Promotion of Private Enterprises (CPPE), Dr Muda Yusuf, who praised the MPC for taking a bold step towards repositioning the economy.
This time, the private sector and the chairman of the MPC, Oluyemi Cardoso, are on the same page.
Reading the communiqué of the MPC meeting, the governor acknowledged that the rate cut was partially motivated by a need to support the economy.
The CBN expects that easing will help align with fiscal stimuli and reforms underway, as Cardoso informed that there has been some improvement in external resilience. Foreign reserves have stabilised, and capital inflows have increased, providing more comfort for a gradual easing, he said.
Undoubtedly, after years of rate hikes and tight policies, the cut signals a willingness to move towards normalisation. Analysts, however, cautioned against unbridled optimism, emphasising that cutting the policy rate is just one of many steps needed to sustain the gains made so far. They believe that for the rate cut to have desired effects, the transmission channels must function effectively, and constraints must be managed.
In theory, banks respond to a lower MPR by reducing their lending rates, which lowers the cost of borrowing for businesses and individuals. However, this is not always altruistic and unrealistic. Other variables must align for this to happen. Banks may resist lowering rates if their cost of funds, risk premiums or desired profit margins remain high.
Weak credit demand, high credit risk, poor collateral regimes and regulatory constraints may also limit the ability of banks to pass on the lower rates. If business expectations are low, firms may not borrow even at reduced rates, suggesting the need for additional support from the fiscal authority.
Despite the cut, many economists argue that the 50 basis points cut is insufficient to alter the underlying economic fundamentals.
To maximise the benefits and minimise the risks associated with this rate cut, experts advised the CBN and government to ensure a coordinated policy approach. They emphasised the importance of avoiding large, unplanned deficits or unsterilised expenditures that could flood the economy with liquidity and potentially lead to inflation.
Ultimately, while a single 50 basis point reduction in the policy rate cannot replace years of tightening, it is symbolic of the new policy direction. This, experts said, is important for anchoring inflation expectations. Just as it took the MPC five consecutive months of inflation monitoring to reduce the interest rate, it will undoubtedly take a few months to assess whether the cut marks the revival of a resilient economy.