Nigeria's Central Bank has made a significant move by cutting its benchmark interest rate to 23 percent from 26.5 percent, marking a record 350 basis point reduction. This decision was made by Governor Olayemi Cardoso and the Monetary Policy Committee on Tuesday. The move aims to bring the Monetary Policy Rate closer to prevailing market rates, rather than signaling a broad shift toward cheap money.
The decision to cut the interest rate follows a three-month continuous cooling of inflation, which stood at 15.39 percent in August, down from 15.43 percent the previous month. Additionally, food prices have declined to 19.57 percent, marking the first slowdown in about six months. These trends likely influenced the Central Bank's decision to adjust its policy framework.
The Central Bank also made changes to its asymmetric corridor, narrowing it to plus 50 basis points and minus 300 basis points. Furthermore, the Standing Deposit Facility was cut to 20 percent, and the Standing Lending Facility was reduced to 23.5 percent. These adjustments aim to strengthen the transmission mechanism of monetary policy.
Analysts have described the move as a "reset" of the Monetary Policy Rate, reflecting the significant disconnect between the previous benchmark rate and prevailing market rates. Razia Khan, managing director and chief economist at Standard Chartered Bank, noted that the 350-basis-point cut came as a surprise, although the changes to the corridor blunt its overall impact.
Khan also highlighted that the new SLF rate is now 23.5 percent, compared with 27 percent previously, while the theoretical floor on interest rates, represented by the SDF, has fallen to 20 percent from 22 percent. She believes that the CBN's decision presents the move less as conventional monetary easing and more as a recalibration aimed at strengthening the transmission mechanism.
Other analysts, such as Ayodele Ebo, chief executive officer of MDU Capital, and Adebowale Funmi, head of Research at Parthian Securities, have welcomed the decision, stating that it should support lower borrowing costs over time and improve sentiment in the equities market. They also noted that the adjustment was positive for the market but did not signal a return to cheap money.
The Central Bank's decision to retain the Cash Reserve Ratio at 45 percent for Deposit Money Banks, 16 percent for Merchant Banks, and 75 percent on non-Treasury Single Account public-sector deposits indicates that it has not relaxed existing liquidity controls on banks. Analysts expect that the impact of the rate cut on the economy will be closely watched, particularly in terms of its effect on lending rates, working-capital costs, and access to consumer credit.
Key points
- The Central Bank of Nigeria cut its benchmark interest rate to 23 percent from 26.5 percent in a record 350 basis point reduction.
- The decision aims to bring the Monetary Policy Rate closer to prevailing market rates.
- The move follows a three-month continuous cooling of inflation and a decline in food prices.
