The Central Bank of Nigeria (CBN) has cut the Monetary Policy Rate (MPR) by 350 basis points to 23 per cent from 26.5 per cent. This move aims to strengthen monetary policy transmission and moderate Nigeria's headline inflation. The rate cut is the lowest since February 2024, when it was pegged at 22.75 per cent. According to the CBN, previous reforms have improved Nigeria's macroeconomic conditions. The latest policy reset intends to maintain focus on inflation while supporting economic growth.
Economists have offered mixed views on the immediate impact of the MPR cut. While some believe it could reduce borrowing costs, others think it may take time to translate into cheaper credit for businesses and consumers. Shakirudeen Taiwo, chief macroeconomist at Cordros Securities Limited, noted that the policy rate cut would likely have different effects across various segments of the economy. He stated that banks and leveraged real-sector corporates would likely capture most of the direct benefits.
The immediate effect on banks as lenders would be the repricing of loans, as many Nigerian corporate facilities are priced using the MPR plus a spread. The 350-basis-point reduction should eventually lower borrowers' interest expenses, although the initial impact could favour banks because deposit rates are likely to adjust faster than loan rates. According to Mr Taiwo, this should support net interest margins (NIMs) over the first one or two quarters.
However, the impact would not be uniform across banks. Tier-1 banks, whose cost of funds is already low, could also gain from securities revaluation and stronger loan growth. Mr Taiwo added that banks with higher funding costs could face greater earnings pressure as income from the Standing Deposit Facility (SDF) declines while lending rates also reprice lower. The 45 per cent cash reserve requirement (CRR) would remain a major constraint on the ability of banks to expand lending rapidly.
The unchanged CRR could limit the extent to which the reduction in the policy rate translates into increased credit to the real sector. Mr Taiwo said that with the CBN leaving the CRR unchanged, the capacity for rapid loan-book expansion remains constrained. It is therefore expected that the initial benefit to bank profitability will be more immediate than the expansion in real-sector credit, which is likely to remain gradual and selective.
On the real sector, Mr Taiwo said the benefits of the rate cut would be greatest for businesses that are highly leveraged, predominantly naira-funded, long-duration and sensitive to financing costs. Manufacturers could experience some relief because the sector is heavily dependent on working capital. However, other factors, particularly foreign exchange availability and energy costs, remain more important drivers of profitability for many manufacturers.
The direct impact on households could be limited because consumer credit remains shallow in Nigeria. While borrowers and some businesses could benefit from lower interest rates, savers and investors holding short-duration financial assets could face weaker returns. As the SDF rate falls to 20%, deposit rates and money-market yields are likely to decline, reducing returns for savers and short-duration fixed-income investors.
Key points
- The CBN's MPR cut may not immediately lead to cheaper loans due to the 45% cash reserve requirement (CRR) constraint.
- The policy rate cut is expected to have a modest positive impact on the manufacturing sector.
- The reduction in the policy rate may compress banks' low-risk investment income, potentially encouraging them to redirect liquidity towards lending or longer-duration securities.
