The Central Bank of Nigeria (CBN) has reduced its benchmark interest rate, the Monetary Policy Rate (MPR), to 23%, the lowest level in 31 months. This decision was made at the CBN's Monetary Policy Committee (MPC) meeting in Abuja on September 21-22. The rate cut aims to reconnect monetary policy with rates in the money market, not to ease its restrictive stance. The CBN also recalibrated its standing facilities corridor to +50/-300 basis points around the MPR.
CBN Governor Olayemi Cardoso stated that the decision was driven by a disconnect between the policy rate and the rates at which banks were trading, weakening the transmission of monetary policy through the financial system. The CBN aims to restore the MPR as the principal signal of monetary policy as it moves toward an inflation-targeting framework. Cardoso emphasized that the move should not be viewed as a signal that the central bank is abandoning its restrictive stance.
The CBN's decision was influenced by an improving macroeconomic environment. Headline inflation slowed to 15.39% in August from 15.43% a month earlier, while food inflation fell to 19.57% from 20.31%. Core inflation declined to 13.29% from 14.97%. The economy is also expanding at a faster pace, with real gross domestic product growing 4.43% in the second quarter from 3.89% in the first.
The CBN's policy reset comes as it continues to repair its monetary-policy operating framework. The adoption of the Nigerian Overnight Financing Rate (NOFA) as a transaction-based operational benchmark has improved transparency in money-market operations. This should help align policy implementation more closely with market conditions. Cardoso described the move as a "reset and recalibration."
Analysts have welcomed the CBN's decision, citing moderating inflation, exchange-rate stability, and improved foreign-exchange market liquidity. Uche Uwaleke, a financial economist, said the MPC's decision was justified by the improving macroeconomic environment. Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), also welcomed the recalibration, saying it was timely given the improving inflation trajectory.
The CBN flagged prolonged geopolitical tensions in the Middle East and election-related spending as risks to the inflation outlook. However, the committee pointed to stronger external and fiscal-monetary coordination. Nigeria's balance-of-payments surplus widened to $3.51 billion in the second quarter from $2.38 billion in the first. Gross foreign reserves stood at $55.25 billion as of September 18, the highest level in 18 years.
The CBN will assess the effectiveness of the recalibrated corridor in strengthening policy transmission, with future decisions remaining data-dependent. Cardoso stressed that the improvement in stability was central to the timing of the reset. The CBN's move aims to address a technical problem that had become increasingly important as it sought to make its monetary-policy framework more market-driven.
Key points
- The Central Bank of Nigeria cuts benchmark interest rate to 23% to improve monetary policy transmission.
- The rate cut aims to reconnect monetary policy with rates in the money market, not to ease its restrictive stance.
- Analysts welcome the CBN's decision, citing moderating inflation, exchange-rate stability, and improved foreign-exchange market liquidity.
