The Central Bank of Nigeria's decision to cut its Monetary Policy Rate by 350 basis points, from 26.5 percent to 23 percent, is one of the biggest changes in the country's monetary policy settings this year. This move aims to stimulate economic growth by making borrowing cheaper. However, the impact of this policy adjustment on bank lending rates, private-sector credit, and government borrowing costs remains to be seen. The average maximum lending rate in the banking sector fell to 29.19 percent in August from 33.16 percent in July, according to Central Bank of Nigeria data.
The reduction in lending rates had already begun before the Monetary Policy Committee's September 21-22 meeting, with a nearly four percentage point drop in one month. This decrease comes as a result of various factors, including changes in funding costs, liquidity conditions, credit risk, operating costs, and expected returns. The experience of previous rate adjustments suggests that the relationship between the policy rate and lending rates is not one-for-one. A 100-basis-point increase in the MPR can produce a much larger increase in lending rates, while an equivalent reduction tends to pass through more slowly.
The next few months will be crucial in determining the effectiveness of the rate cut in stimulating economic growth. Manufacturers, traders, property developers, farmers, and other businesses whose investment decisions depend on the cost and availability of bank credit will be closely watching the developments. Private-sector credit increased for the third consecutive month in August, reaching N84.55 trillion from N83.43 trillion in July. This growth is encouraging, but the level of private-sector credit tells a more complicated story, still being N10.06 trillion below the N94.61 trillion recorded in February.
The composition of private-sector credit will matter just as much as the headline number. The CBN's Q1 2026 data showed significant differences across sectors, with manufacturing credit falling from N6.57 trillion in January to N5.77 trillion in March, while oil and gas lending declined from N10.91 trillion to N10.58 trillion. In contrast, power and energy credit rose from N1.30 trillion to N1.61 trillion, while real-estate lending increased from N4.67 trillion to N6.29 trillion. This indicates that an increase in aggregate private-sector credit will not necessarily mean that productive sectors are receiving a larger share of bank lending.
Government borrowing costs are also an essential aspect of the transmission of monetary policy. Government credit fell to N32.70 trillion in August from N33.92 trillion in July, according to CBN data. The stop rate on the 364-day Treasury bill fell from 17.59 percent on August 12 to 16.62 percent on September 9, representing a 97-basis-point decline in less than a month. Demand for Treasury bills remained strong, with over N2.5 trillion in subscriptions for the N500 billion one-year bill offer at the September 9 auction.
A lower interest-rate environment generally reduces the returns available on deposits and other short-term fixed-income instruments. Following the new MPR, the minimum savings rate is expected to fall to about 6.9 percent from 7.95 percent, while the Standing Deposit Facility was recalibrated to 20 percent. This could lead to a redistribution within the financial system, with borrowers standing to benefit if lending rates fall, while savers and investors in lower-risk instruments may have to accept lower returns.
The biggest economic test is whether cheaper money produces more investment and output rather than simply benefiting borrowers. The impact of the rate cut on the overall economy will depend on various factors, including the transmission of the policy rate to bank lending rates, the growth of private-sector credit, and the government's borrowing costs. As the economy adjusts to the new monetary policy settings, stakeholders will be closely monitoring the developments to assess the effectiveness of the Central Bank's decision.
Key points
- The Central Bank of Nigeria's 350 basis points interest rate cut aims to stimulate economic growth by making borrowing cheaper.
- The relationship between the policy rate and lending rates is not one-for-one, with a 100-basis-point increase in the MPR producing a much larger increase in lending rates.
- The growth of private-sector credit and the composition of credit across sectors will be crucial in determining the effectiveness of the rate cut.
