Nigeria's Central Bank, in a surprise move on Tuesday, cut its benchmark interest rate to 23 per cent from 26.5 per cent, a decision analysts say could have a broadly positive impact on the market. The rate cut, described as an "operational reset" by the bank's governor, Olayemi Cardoso, aims to improve the effectiveness of monetary policy and aid the shift to an inflation-targeting framework. This move is expected to ease borrowing costs and influence market dynamics.
According to Arnold Dublin-Green, CIO/COO of BGL Asset Management Limited, the rate cut is "very supportive for markets," although it benefits equities more than fixed income. He predicts a rotation out of fixed income into equities, leading to strengthening in equity markets relative to yields in the Treasury bill market. However, Dublin-Green also notes that oil price volatility and pre-election spending could put pressure on the market heading into 2027.
The decision to cut the interest rate comes on the back of consistently easing inflationary pressure in Nigeria, with consumer inflation dropping to 15.39 per cent in August from 15.43 per cent a month earlier. This trend has given the monetary policy committee room to adjust rates. Additionally, the naira has gained about 8 per cent against the dollar so far this year, and external reserves have reached $55.3 billion, the highest level in eighteen years.
Analysts, including Oluwayemisi Sunmola of Vetiva Capital Management, view the rate cut as a recalibration to align the benchmark policy rate with prevailing market conditions. Sunmola notes that this move strengthens monetary policy transmission and provides a clearer framework for pricing financial assets. Matilda Adefalujo of Meristem Securities expects OMO bills to trend toward treasury bills and bonds, which have seen declines in average yields.
Despite the steep cut in the interest rate, the real interest rate in Nigeria remains reasonably strong at 7.61 per cent, one of the highest in sub-Saharan Africa, according to Dublin-Green. This suggests that the rate cut will not lead to a significant decrease in the attractiveness of Nigerian assets. Adefalujo believes that the rate on OMO bills will not fall as sharply as those on bonds and treasury bills, given the need to maintain a premium to incentivise foreign portfolio investors.
The rate reduction presents an opportunity for the government to borrow at lower rates, which could help in securing funding before potential future inflation spikes. Adefalujo also sees the move as helpful for the Central Bank to intervene in the FX market and sustain the stability of the naira. The overall positive macroeconomic indicators and the Central Bank's proactive stance are expected to support market stability and growth.
As the market adjusts to the new rate, investors are likely to see a shift in dynamics, with potential for increased activity in equity markets and a recalibration of asset prices. The Central Bank's decision reflects its confidence in the current macroeconomic conditions and its commitment to ensuring that monetary policy remains effective and aligned with market realities.
Key points
- The Central Bank of Nigeria cut its benchmark interest rate to 23 per cent from 26.5 per cent.
- Analysts predict a positive impact on the market, with potential for increased activity in equity markets.
- The real interest rate in Nigeria remains reasonably strong at 7.61 per cent.
