The Central Bank of Nigeria has undertaken a significant overhaul of its monetary policy framework. At its latest meeting in Abuja, the Monetary Policy Committee decided to lower the Monetary Policy Rate to 23 per cent, a 350-basis-point reduction from the 26.5 per cent maintained at the July meeting. This change aims to make the central bank's monetary policy operations more effective.
The adjustment includes a new standing facilities corridor of +50 and -300 basis points around the new MPR. According to CBN Governor Olayemi Cardoso, this change is intended to bring official policy signals closer to developments in the money market. The committee also considered the gap between the official policy rate and market rates, which had weakened the effectiveness of monetary policy transmission.
The Monetary Policy Committee, with eleven members participating, aimed to address the divergence between the MPR and prevailing market rates. This divergence had raised concerns about the policy rate's ability to transmit the CBN's monetary decisions to the wider economy. The changes are meant to improve the connection between the benchmark rate and actual conditions in the money market.
The CBN has taken steps to improve transparency and effectiveness, including adopting the Nigerian Overnight Financing Rate as a transaction-based operational benchmark. The committee considered a reset of the benchmark rate and a new configuration of the policy corridor necessary to reflect prevailing market conditions. This would strengthen policy transmission and restore the MPR principle of monetary policy.
CBN Governor Olayemi Cardoso emphasized that the adjustment does not constitute a change in the current monetary policy stance but rather an operational reset to enhance effectiveness and support the transition to an inflation-targeting framework. The committee left existing cash reserve requirements unchanged, with deposit money banks maintaining a 45 per cent CRR and merchant banks 16 per cent.
The unchanged reserve requirements indicate that the committee focused on recalibrating the price and operational signals of monetary policy. The economic environment provided sufficient room for the adjustment, with moderating inflation, stronger external reserve buffers, and increased investor confidence. The committee acknowledged considerable improvements in the balance of the economy.
The new 23 per cent MPR will operate with the revised standing facilities corridor, aiming to improve the relationship between the CBN's policy signal and money-market conditions. This decision supports Nigeria's transition towards an inflation-targeting framework, under which effective and transparent monetary policy operations are crucial. The measures are part of the CBN's efforts to repair and strengthen the monetary policy implementation framework.
Key points
- The Central Bank of Nigeria lowers the Monetary Policy Rate to 23 per cent.
- The CBN adjusts the standing facilities corridor to +50 and -300 basis points around the new MPR.
- The changes aim to enhance the effectiveness of monetary policy and support the transition to an inflation-targeting framework.
