The Central Bank of Nigeria has reduced its benchmark interest rate by 350 basis points to 23%, marking a significant shift from its aggressive monetary tightening policy. This move is expected to make credit cheaper for businesses and lower borrowing costs for the government. The rate cut was announced after the Monetary Policy Committee's 307th meeting on September 22. The committee had previously raised the rate to 26.5% in response to high inflation and a weak naira.
The rate cut is seen as a "reset and recalibration" of the monetary policy, aimed at correcting the disconnect between the policy rate and actual money-market rates. The Nigerian Overnight Financing Rate had traded around 22% since its introduction in April, while the benchmark rate remained at 26.5%. The Central Bank believes that resetting the rate closer to prevailing market conditions will strengthen monetary policy transmission and restore the benchmark rate as a key signal of monetary policy.
The Central Bank's governor, Olayemi Cardoso, emphasized that the battle against inflation is not over, and the bank will maintain a restrictive monetary policy stance for as long as necessary. However, Cardoso noted that economic conditions have improved, with headline inflation slowing to 15.39% in August from 15.43% in July. Food inflation also declined to 19.57% from 20.31%, while core inflation dropped to 13.29% from 14.97%.
The external position of Nigeria has also strengthened, with a balance-of-payments surplus of $3.51 billion in the second quarter, up from $2.38 billion in the first quarter. The current-account surplus increased by 67.92% to $7.54 billion from $4.49 billion. External reserves stood at $55.25 billion on September 18, their highest level in 18 years, sufficient to cover 11.3 months of imports.
Economic growth has also picked up, with real Gross Domestic Product expanding by 4.43% in the second quarter, up from 3.89% in the first quarter. Non-oil GDP growth accelerated to 4.31% from 3.94%, while oil-sector growth rose to 7.31% from 2.57%. These indicators suggest that the Central Bank has room to adjust interest rates.
Businesses, particularly manufacturers, are awaiting cheaper loans, but the significance of the rate cut will ultimately depend on lending rates. Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, noted that high financing costs have constrained investment, production, and job creation. He expects banks to reflect the new monetary policy environment in credit pricing, with lending rates adjusting downwards.
The adjustment to the Central Bank's interest-rate corridor provides a channel for transmission of the rate cut to borrowers. The Standing Lending Facility rate has fallen from 27% to 23.5%, while the Standing Deposit Facility rate declined from 22% to 20%. The impact of the policy adjustment on investment and economic growth will depend on the transmission of the rate cut to borrowers.
Key points
- The Central Bank of Nigeria has reduced its benchmark interest rate by 350 basis points to 23%.
- The rate cut aims to correct the disconnect between the policy rate and actual money-market rates.
- The impact of the policy adjustment on investment and economic growth will depend on the transmission of the rate cut to borrowers.
