Rate cut raises hopes for cheaper business loans

After more than two years of aggressive monetary tightening, the Central Bank of Nigeria has lowered its benchmark interest rate by 350 basis points to 23 per cent. While businesses could benefit from cheaper credit and the government from lower borrowing costs, analysts warn that the real test lies in bank lending rates, inflation and the naira, SAMI TUNJI writes

For more than two years, Nigerian businesses faced a difficult combination of high operating costs and expensive credit. Manufacturers borrowed at rates that squeezed already thin margins, smaller businesses struggled to finance working capital, while investors earned unusually high returns from government securities.

The Central Bank of Nigeria’s latest monetary policy decision could begin to change that equation.

At the end of its 307th meeting on September 22, the Monetary Policy Committee reduced the Monetary Policy Rate by 350 basis points from 26.5 per cent to 23 per cent, the largest single reduction since the current easing cycle began.

It was also the second cut this year. The committee reduced the rate by 50 basis points in February before holding it at 26.5 per cent in May and July.

The MPC also narrowed the Standing Facilities Corridor from +50/-450 basis points to +50/-300 basis points around the MPR. It retained the Cash Reserve Requirement at 45 per cent for deposit money banks, 16 per cent for merchant banks and 75 per cent for non-Treasury Single Account public-sector deposits.

On the surface, cutting the benchmark rate by 3.5 percentage points appears to mark a decisive turn from the aggressive monetary tightening that characterised much of CBN Governor Olayemi Cardoso’s first three years in office.

The CBN, however, says that interpretation misses an important part of the decision.

Closing the gap

Rather than presenting the reduction simply as monetary easing, Cardoso described it as a “reset and recalibration” aimed partly at correcting a widening disconnect between the policy rate and actual money-market rates.

That disconnect had become difficult to ignore. According to analysts at the Financial Markets Dealers Association, the Nigerian Overnight Financing Rate had traded broadly around 22 per cent since its introduction in April 2026, while the MPR remained at 26.5 per cent.

That left a roughly 450-basis-point gap between the official policy rate and the rate at which funds were actually changing hands overnight.

The CBN reached a similar conclusion. “The observed divergence between the MPR and the prevailing market rates had weakened the effectiveness of monetary policy transmission,” Cardoso said.

It argued that resetting the MPR closer to prevailing market conditions would strengthen transmission and restore the benchmark rate as the principal signal of monetary policy.

During the question-and-answer session after the MPC briefing, Cardoso was more explicit. “The rates at which the interbank is working are disconnected from the MPR, and there’s a need to fix that,” the governor said.

“Because if you don’t fix that, your transmission process and your transmission mechanism weaken.”

In practical terms, therefore, part of the 350-basis-point reduction reflects a market adjustment that had already occurred rather than 350 basis points of fresh monetary stimulus.

That distinction matters because the CBN does not believe the battle against inflation is over. “We will stay on the course, which has been a restrictive one, for as long as we have to,” he said.

Still, the CBN believes economic conditions have improved enough to accommodate the adjustment. “Fundamentals have changed,” Cardoso said. “We are at macroeconomic stability.”

Headline inflation slowed to 15.39 per cent in August from 15.43 per cent in July, extending its decline for a third consecutive month. Food inflation fell to 19.57 per cent from 20.31 per cent, while core inflation declined more sharply to 13.29 per cent from 14.97 per cent.

Month-on-month headline inflation also slowed from 1.57 per cent in July to 0.71 per cent in August.

The external position has strengthened too. Nigeria recorded a balance-of-payments surplus of $3.51bn in the second quarter, compared with $2.38bn in the first quarter, while its current-account surplus increased by 67.92 per cent to $7.54bn from $4.49bn.

External reserves stood at $55.25bn on September 18, their highest level in 18 years and sufficient to cover an estimated 11.3 months of imports.

Economic growth has also strengthened. Real Gross Domestic Product expanded by 4.43 per cent in the second quarter, compared with 3.89 per cent in the first. Non-oil GDP growth accelerated to 4.31 per cent from 3.94 per cent, while oil-sector growth rose to 7.31 per cent from 2.57 per cent.

Together, those indicators explain why the CBN believes it now has greater room to recalibrate rates. Whether businesses benefit is another matter.

Businesses await cheaper loans

For businesses, particularly manufacturers, the significance of the MPC decision will not ultimately be measured by the movement from 26.5 per cent to 23 per cent. It will be measured by what happens to lending rates.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said high financing costs had become a major constraint on investment, production, working capital and job creation.

He identified manufacturing, agriculture, construction and logistics among sectors where high commercial lending rates had become particularly difficult to reconcile with productive investment because of their long investment cycles and tight margins.

“The policy adjustment therefore offers an opportunity to reduce the cost of capital, improve business cash flows, stimulate investment and strengthen the productive capacity of the economy,” Yusuf said.

But he stressed that the benefits were not automatic. “The ultimate economic value of the decision will depend on transmission,” he said.

“The CPPE expects banks to reflect the new monetary policy environment in the pricing of credit. Lending rates on both new and existing facilities should progressively adjust downwards. Without meaningful transmission to borrowers, the impact of the policy adjustment on investment and economic growth would be limited.”

The adjustment to the CBN’s interest-rate corridor provides one channel through which that transmission could occur.

FMDA analysts noted that the Standing Lending Facility, the rate at which banks obtain overnight liquidity from the CBN, has fallen from 27 per cent to 23.5 per cent.

At the other end, the Standing Deposit Facility, which applies when banks place surplus liquidity with the CBN, declined from 22 per cent to 20 per cent.

• CBN prepares to mop up N4.69tn as liquidity rises
• Banks seek more time for CBN data localisation
• Liquidity surplus pushes banks’ CBN deposits to N6.28tn

Cheaper central bank liquidity should, in theory, give lenders more room to reduce the price of credit to businesses.

Analysts at BAS Capital said lower borrowing costs could support investment, working capital and business expansion, particularly for firms with floating-rate loans. Companies carrying substantial naira-denominated debt could also see finance costs decline, improving profit margins.

But there is a significant brake on that optimism. The MPC retained the CRR for deposit money banks at 45 per cent. This means a substantial proportion of bank deposits remains sterilised at the CBN and unavailable for lending.

BAS Capital warned that the high CRR could constrain the volume of loanable funds even as the price of central bank liquidity declines.

Investors face new equation

The consequences of the MPC decision stretch beyond bank borrowers. For almost two years, elevated interest rates made government securities attractive to investors and increased the incentive to hold fixed-income assets rather than take risks in equities or productive businesses.

That equation could gradually change. Analysts at BAS Capital expect yields on Treasury bills and other fixed-income securities to face downward pressure as markets adjust to the new benchmark.

Existing holders of longer-dated bonds could benefit. Because bond prices generally move inversely to yields, securities bought during the high-rate period become more valuable when market yields decline.

FMDA analysts similarly expect long-term government bond holders to benefit more from falling yields than investors in short-dated Treasury and OMO bills.

The reverse applies to investors seeking fresh high-yielding securities.

Savers will also feel the adjustment. The minimum savings deposit rate is tied to 30 per cent of the MPR. FMDA calculated that reducing the policy rate from 26.5 per cent to 23 per cent lowers the minimum savings rate from about 7.95 per cent to 6.90 per cent.

Fixed deposits, call deposits and money-market fund returns could also gradually decline as the broader interest-rate environment reprices. Equities could become relatively more attractive.

BAS Capital said lower yields could encourage investors to rotate some funds from fixed income into the stock market, while reduced finance costs could improve the earnings of listed companies with significant debt, particularly in manufacturing, industrials and oil and gas.

For the Federal Government, perhaps the biggest potential benefit is cheaper debt. Years of elevated interest rates increased the yields required to attract investors into government securities, worsening domestic debt-service costs.

Yusuf said sustained moderation in rates could reduce the marginal cost of government borrowing and, over time, ease domestic debt-service pressures.

That, he argued, could create additional fiscal room for infrastructure, security, education and healthcare.

CPPE also warned that a narrower interest-rate differential between Nigeria and other markets could trigger portfolio reversals and renewed foreign-exchange pressure.

BAS Capital raised a similar concern, noting that businesses heavily reliant on imported raw materials would have to balance cheaper local financing against the possibility of exchange-rate volatility.

FMDA analysts expect some pressure on the naira as yields decline, although Nigeria’s recent inclusion in J.P. Morgan’s GBI-EM Edge index could provide a counterweight through additional index-linked foreign investment.

Growth faces stability test

The final test of the rate cut is whether it produces more investment and output without returning Nigeria to higher inflation.

The MPC expects inflation to moderate further in the short to medium term, supported by foreign-exchange stability, the lagged effects of earlier monetary tightening and improved food supply during the harvest season.

But it identified geopolitical tensions in the Middle East and election-related spending as risks that could push prices higher again.

The election risk is particularly important because lower rates and increased political spending could simultaneously inject more liquidity into the economy.

Cardoso said the CBN was already preparing for that possibility.

“We are ready,” the governor said during the MPC briefing, explaining that the bank had studied previous election cycles and developed scenarios for managing the expected increase in liquidity.

He said the apex bank would monitor currency in circulation, banking-system liquidity, monetary aggregates and foreign-exchange demand.

“We will proactively deploy any tools and instruments to mop up any excess liquidity,” Cardoso said. “We will not allow ourselves to be caught unaware in any form.”

The recently signed fiscal-monetary coordination agreement between the CBN and the Federal Ministry of Finance could become important in managing that balance.

Cardoso said the arrangement was designed to institutionalise coordination between fiscal and monetary authorities rather than allow cooperation to depend on whoever occupies the two offices.

The governor said such coordination would become even more important as Nigeria moves towards an inflation-targeting framework.

Yusuf agrees that interest rates alone cannot deliver the desired economic recovery.

The CPPE chief said a significant proportion of Nigeria’s inflation remained structural and supply-driven, citing energy costs, logistics bottlenecks, insecurity, food-production constraints, infrastructure deficits and high regulatory costs.

“The current monetary recalibration should therefore be complemented by stronger fiscal and structural interventions aimed at reducing production costs, improving productivity, strengthening food and energy security, and expanding domestic productive capacity,” the CPPE said.

The Manufacturers Association of Nigeria earlier urged stronger coordination between monetary and fiscal authorities, calling for single-digit concessionary financing for manufacturers and measures to ensure banks transmit the rate cut into lower commercial lending rates.