By Suleyman A. Ndanusa, PhD, OON
The immediate benefit of the Central Bank of Nigeria’s latest monetary policy decision is that it offers businesses, households and government some prospect of relief from an exceptionally expensive interest rate environment. By reducing the Monetary Policy Rate from 26.5 per cent to 23 per cent a substantial 350 basis point adjustment the Monetary Policy Committee has acknowledged that successful disinflation should eventually produce a dividend for the productive economy.
For manufacturers carrying costly inventories, farmers financing another planting season, small businesses struggling with overdrafts and government confronting a heavy domestic debt service bill, this is welcome news. Monetary tightening may be necessary medicine, but even good medicine should not become the patient’s permanent diet.
The decision is therefore understandable and, in broad terms, supportable. Inflation has moderated, the foreign exchange market has become more orderly, external reserves have strengthened and confidence in monetary policy management has improved. Following a long period of tightening, there was a reasonable case for recalibrating the policy stance before high interest rates caused deeper damage to investment, employment and productive capacity.
However, the size of the reduction makes this more than a ceremonial adjustment. A 350 basis point cut is a bold signal that the CBN believes the gains already made are sufficiently established to permit some support for economic activity. The decision will consequently be judged not by the applause that followed the announcement, but by what happens next.
Will banks reduce their lending rates? Will credit flow to manufacturing, agriculture, exports and small businesses? Will government security yields moderate sufficiently to discourage the comfortable habit of lending mainly to government? Will private investment respond? And, most importantly, can all this happen without reopening the doors to inflation and exchange rate instability?
The wider policy configuration shows that the CBN is not throwing money from a helicopter over Abuja. The Cash Reserve Ratio remains 45 per cent for deposit money banks and 16 per cent for merchant banks, while the ratio on non TSA public sector deposits remains 75 per cent. The Loan to Deposit Ratio also remains 50 per cent, having been reduced from 65 per cent in April 2024. Its absence from the latest announcement should not be interpreted as its abolition.
The adjustment to the standing facilities corridor placing the lending facility around 23.5 per cent and the deposit facility around 20 percent is intended to make it less attractive for banks merely to park surplus funds with the CBN and more attractive to deploy liquidity into the economy. But the combination of a high CRR and a 50 per cent LDR confirms that this is calibrated easing, not a festival of cheap money.
That distinction is important because the MPR does not travel directly from the MPC meeting room into the pocket of a manufacturer. It first affects interbank rates, Treasury bill yields, government
bond pricing and banks’ marginal funding costs. Commercial lending rates respond later, and sometimes reluctantly. Between the policy rate and the factory gate stand liquidity conditions, reserve requirements, operating costs, credit risk, government borrowing and the banks’ preference for safe securities.
A lower MPR may therefore reduce market yields without materially reducing the cost of productive credit. If that happens, the financial markets will enjoy the party while the real economy merely hears the music from outside.
The domestic case for easing must also be placed against an increasingly difficult international environment. The US Federal Reserve recently raised its target range by 25 basis points to 3.75 – 4.00 per cent and indicated that further tightening may be necessary. The Bank of England, meanwhile, maintained its policy rate at 3.75 per cent in September. This does not mean that Nigeria must automatically follow Washington or London. Monetary policy is not an international choir in which every central bank must sing the same note. But global interest rates affect the returns international investors demand from Nigerian assets.
As rates rise in major economies, dollar assets become more attractive. The interest rate premium offered by naira securities narrows, particularly when investors adjust for inflation and exchange rate risk. This can weaken portfolio inflows, encourage capital outflows and increase demand for foreign currency. A stronger dollar would then make imports more expensive and could transmit renewed inflation into Nigeria.
Recent global energy pressures add another complication. Higher oil prices may improve Nigeria’s export receipts, fiscal revenue and foreign exchange inflows. The IMF similarly observes that higher global fuel, food and fertiliser prices can benefit Nigerian exports and public revenue. But it also warns that they generate inflationary pressure and may worsen poverty and food insecurity.
Nigeria’s position is therefore rather like that of a man who owns a well but still buys some of his drinking water from the market. Higher oil prices can strengthen export earnings, yet they also raise transport, logistics, aviation, electricity generation and production costs. The net benefit depends on domestic oil production, refinery performance, petrol pricing arrangements, import requirements and whether additional oil receipts actually reach the reserves and fiscal accounts.
The World Bank has projected global growth of only 2.5 per cent in 2026, amid energy disruptions, geopolitical conflict and weakening prospects across many developing economies. Slower global growth can weaken demand for exports, dampen investment flows and increase risk aversion. Nigeria could therefore face the uncomfortable combination of higher imported costs and less abundant external financing.
This is the principal risk surrounding the CBN’s decision: domestic conditions may justify easing just as the international environment begins to tighten.
There are also important domestic risks. Nigeria’s inflation is not driven only by excess demand. Food insecurity, energy costs, transport bottlenecks, exchange rate movements, insecurity in farming communities and weak logistics remain powerful influences. An MPR reduction cannot repair a bad road, secure a farm or manufacture electricity. Yet monetary easing can still add demand and liquidity to an economy whose supply response remains constrained.
The IMF’s recent work suggests that Nigeria’s responsiveness to monetary policy is improving, although inflation has historically been heavily influenced by food prices, supply shocks, deficit financing and exchange rate depreciation. This means that the CBN’s actions now matter more but it also means that a policy error could transmit more quickly.
Fiscal behaviour will be decisive. If the Federal Government simultaneously expands spending rapidly, borrows heavily from the domestic market or allows large liquidity injections without careful sequencing, the CBN may be easing into an inflationary fiscal wind. The recently signed fiscal monetary coordination agreement must therefore move beyond photographs and communiqués. It should provide a practical mechanism for coordinating borrowing calendars, liquidity forecasts, foreign exchange flows, debt management and the timing of major government expenditures.
One arm of policy cannot be applying the accelerator while the other remains firmly on the brake. Neither should both arms accelerate enthusiastically while nobody watches the road.
The reduction should consequently be treated as the opening of a cautious easing cycle, not a promise of uninterrupted cuts. The CBN should preserve the freedom to pause if inflation expectations deteriorate, the naira comes under pressure, reserves weaken or global financial conditions tighten further. Forward guidance should be conditional and transparent rather than heroic. Markets are reassured not by promises that nothing can go wrong, but by evidence that the authorities know what they will do when something does.
The CBN should also publish a simple monetary policy transmission dashboard showing movements in average deposit rates, prime and maximum lending rates, interbank rates, government security yields, private sector credit and sectoral credit allocation. This would allow the public to see whether the reduction is reaching agriculture, manufacturing, exports and small businesses or merely improving bank margins and asset prices.
Particular attention should be paid to the interaction among the 23 per cent MPR, the 45 per cent CRR and the 50 per cent LDR. If banks remain heavily constrained by sterilisation, risk costs and attractive government yields, the policy rate reduction may not generate the intended credit response. A careful review of these instruments may eventually be required, but they should not all be loosened simultaneously. One does not test every door and window during a storm.
Foreign exchange buffers must also be protected. Higher oil receipts should be used partly to strengthen genuinely usable reserves and reduce external vulnerabilities rather than create a new round of procyclical expenditure. Exchange rate flexibility should remain an important shock absorber, while disorderly movements and speculative pressures are managed through transparent and rules based interventions. The IMF has similarly emphasised the value of exchange rate flexibility in absorbing external shocks.
The ultimate verdict on the MPC decision should therefore be balanced. The rate cut recognises the progress achieved in reducing inflation and stabilising the foreign exchange market. It offers an opportunity to begin repairing the damage that excessively expensive credit has inflicted on production, investment and employment. The still positive real policy rate also leaves a meaningful degree of monetary restraint.
But the size of the cut, combined with higher international interest rates, volatile energy prices, geopolitical tensions and Nigeria’s continuing supply constraints, leaves little room for complacency. The policy is defensible, but its defence must rest on evidence rather than optimism.
The CBN has taken its foot slightly off the brake at a time when the international road is becoming more slippery. That may be necessary if the economy is to move again. But the headlights must remain on, the speed must be watched and both hands must remain firmly on the steering wheel.
The decision will have succeeded only when inflation continues to moderate, the naira remains broadly stable and productive businesses not merely financial markets begin to experience cheaper and more accessible credit. Anything less would turn a bold monetary reset into a handsome announcement in search of an economic result.
Suleyman A. Ndanusa, PhD, OON, is an economist, lawyer, strategic studies scholar, and public policy thinker and practitioner with extensive experience in financial markets, regulation, governance, national Security and development.
