CBN: What manner of rate cut?

THE CBN’s 350-basis-point reduction in the Monetary Policy Rate, from 26.5 per cent to 23 per cent, the lowest level in 20 years, is significant. But for Nigerian businesses, particularly manufacturers and SMEs, the more important question is how much of that reduction will pass through to credit prices.

For entrepreneurs confronting bank loans priced at up to 45 per cent, the CBN’s calculations may remain largely academic. The central paradox is that the Bank has reduced the price of its policy signal without necessarily reducing the price businesses actually pay for loans.

The Monetary Policy Committee’s September 21–22 meeting reset the MPR to 23 per cent, narrowed the standing-facilities corridor to +50/-300 basis points, and kept the Cash Reserve Requirement at 45 per cent for deposit money banks.

Governor Olayemi Cardoso is right to insist that the decision should not be interpreted as a wholesale abandonment of tight monetary policy. He has described it as a “reset” and “recalibration,” rather than conventional monetary easing.

The CBN’s own data explain the decision. The Nigerian Overnight Financing Rate, which the Bank wants to establish as the transaction-based operational reference rate, was around 22 per cent immediately before the announcement. The old 26.5 per cent MPR had increasingly become disconnected from actual money-market conditions.

Cardoso was therefore partly correcting a monetary-policy signalling problem. The MPR had become a number that said one thing while the money market said another. The reset seeks to restore its relevance as the principal policy signal.

There is also a credible macroeconomic case for the move.

The material supplied with the CBN announcement put headline inflation at 15.39 per cent in August, while real GDP growth accelerated to 4.43 per cent in the second quarter from 3.89 per cent in the first.

External reserves of $55.25 billion represented an 18-year high and approximately 11.3 months of import cover. The balance-of-payments surplus rose to $3.51 billion in Q2 from $2.38 billion in the first, while the current-account surplus increased to $7.54 billion.

Cardoso is therefore justified in arguing that the fundamentals have changed sufficiently to permit a recalibration after an exceptionally aggressive tightening cycle.

But monetary policy is ultimately judged not by the details of its announcement, but by its transmission into the economy.

Less than a week after the rate cut, reports indicated that commercial lending rates remained between 20 per cent and 46 per cent, depending on borrower risk, funding costs and individual bank pricing.

Some banks were still reviewing their loan books through their asset-liability committees before deciding whether to reprice credit.

More revealing is the asymmetry already emerging. Banks appear considerably quicker to reduce what they pay savers than what they charge borrowers.

For instance, Ecobank, in a notice to customers following the MPR cut, reduced interest on four savings products from between 7.95 per cent and 8.95 per cent to between 6.90 per cent and 7.90 per cent.

This skewed transmission frustrates businesses. When rates rise, banks are quick to explain that increased funding costs require more expensive loans. When rates fall, however, the reduction can suddenly become complicated by risk assessments, legacy deposits, liquidity management, capital requirements and operating costs.

Some of these explanations are legitimate.

A bank that collected expensive deposits six months ago cannot pretend those liabilities became cheaper simply because the CBN changed its benchmark today. Loan and deposit books have different maturities, and banks must manage interest-rate, liquidity and credit risks.

But this raises a fundamental question: how quickly did banks pass previous MPR increases through to borrowers, and how quickly are they now passing the reduction through? The answer matters because monetary policy cannot stimulate investment if its benefits are confined to the banking system.

The CBN’s decision to retain a 45 per cent CRR means a large proportion of banks’ deposits remains sterilised as the bank tries to control liquidity and prevent excessive money creation from reigniting inflation.

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The trade-off is that banks must earn sufficient returns from a smaller pool of lendable funds to cover funding costs, capital requirements, operating expenses, credit losses and shareholder expectations.

There may be good reasons for maintaining the reserve requirement, but if the objective is stronger private-sector credit transmission, the trade-off deserves greater scrutiny.

The elephant in the room, however, is aggressive government borrowing.

FGN bond allotments rose by 106 per cent to N7.15 trillion in the first nine months of 2026 compared with N3.48 trillion in the year-ago period. The weighted average marginal yield rate was indicated at 17.43 per cent, dipping from 18.45 per cent in 2025 and 19.85 per cent in 2024. OMO yields have swung between 18 and 20 per cent across tenors this year.

When government securities offer attractive, relatively low-risk returns, banks have a strong incentive to allocate capital there rather than take the additional risk of lending to an SME whose factory may lose power, whose imported inputs may double in price and whose customers may default. This is classic crowding out.

Nigeria therefore faces a peculiar policy contradiction. The government wants banks to finance productive businesses, but it is itself a major competitor for available domestic savings.

Until fiscal borrowing becomes less aggressive and government securities cease to offer such compelling risk-adjusted returns, monetary policy alone cannot solve the private-sector credit problem.

Nigeria’s risk premium is another challenge and is becoming an economic tax. Lenders face power shortages, insecurity, weak infrastructure, exchange-rate volatility, uncertain collateral recovery, elevated default risk and expensive technology and branch networks. Those costs inevitably find their way into loan pricing.

But the argument becomes less convincing when risk premiums become so high that productive investment itself becomes commercially irrational. If a manufacturer borrows at 40 per cent, the business must generate returns comfortably above that level merely to make borrowing worthwhile.

Businesses consequently postpone expansion, reduce inventories, abandon equipment purchases, rely on retained earnings or resort to informal finance. Smaller firms are particularly vulnerable. The CBN has acknowledged that SMEs account for more than 80 per cent of employment while facing serious difficulty accessing credit for expansion.

Nigeria cannot truly aspire to sustained industrialisation while productive enterprises face financing costs that make long-term investment prohibitive.

However, high interest is only part of the burden. Loan-processing fees, management fees, commitment charges, collateral-related expenses, insurance, valuation costs, legal fees and other transaction charges compound the problem.

Some are legitimate costs of financial services; the concern is their cumulative effect and, sometimes, their opacity.

The irony is sharper when banks charge heavily while service delivery remains unreliable. Failed transfers, unresolved complaints, downtime, delayed reversals and poor responsiveness can make banking a nightmare. The CBN’s complaints framework recognises the problem by providing escalation mechanisms for unresolved complaints.

Still, weak transmission should not be accepted as an immutable law of economics. The European Central Bank’s experience shows that policy rates normally feed into money markets first and then, with lags, into bank funding costs and lending rates.

The Bank of Ghana has linked lower reserve requirements, treasury-bill yields, funding costs and non-performing loans to the prospect of cheaper commercial lending. Kenya’s repeated rate cuts, from 13 per cent in early 2024 to 8.75 per cent by February 2026, also demonstrate that sustained monetary recalibration is possible when inflation and financial conditions permit it.

Nigeria should not blindly copy other countries. The lesson is that rate reductions work best when accompanied by reforms that improve transmission.

Nigeria needs a functioning credit market in which sound businesses can borrow at rates that allow them to invest, employ people and generate returns.

The CBN has reset the signal. The real assessment is whether cheaper money reaches the businesses that drive production and jobs.