Rate cut positive for markets, analysts say

The decision by Nigeria’s monetary authority on Tuesday to cut the reference rate by up to 350 basis points could have a broadly positive impact, according to analysts.

“I actually think it’s quite positive. But the risk for the rest of the year is oil price volatility and pre-election spending that might put some pressure, heading into 2027,” Arnold Dublin-Green, CIO/COO, BGL Asset Management Limited, told PREMIUM TIMES on Wednesday.

“There’ll be a rotation out of fixed income into equities and, generally, equity markets that have a good representation of positive macro. You should see strengthening in equity markets relative to yields in the Treasury bill market. But asset prices as a whole will trade better,” he added.

The investment banker noted that the downward rate adjustment is “very supportive for markets,” even though it benefits equities more than fixed income, and will help ease borrowing costs for the Debt Management Office.

He pointed to the likelihood that the CBN’s OMO bills would decline due to the interest rate reduction.

In a surprise move on Tuesday, the CBN, at the end of its rate-setting meeting, pared down the benchmark rate to 23 per cent from 26.5 per cent, a push Olayemi Cardoso, the bank’s governor, called “an operational reset” to improve the effectiveness of monetary policy and aid the shift to an inflation-targeting framework.

Mr Cardoso drew attention to the divergence between the reference rate and the prevailing market rates, which he remarked had eroded the effectiveness of monetary policy transmission.

Inflationary pressure has been consistently easing in Africa’s most populous nation over the past few months, with consumer inflation dropping to 15.39 per cent in August from 15.43 per cent a month earlier, giving the monetary policy committee room to cut rates.

Other positive macroeconomic indicators include exchange rate stability (with the naira gaining about 8 per cent against the dollar so far this year) and much stronger external reserves, now at $55.3 billion, the peak level in eighteen years.

Those favourable conditions have allowed the CBN to cut the interest rate from a position of strength.

Even with the steep cut in the interest rate, the real interest rate, which measures the difference between the nominal interest rate and the inflation rate, is still reasonably strong at 7.61 per cent, one of the highest in sub-Saharan Africa, Mr Dublin-Green said.

“The reset of the MPR to 23 per cent should not be seen as conventional monetary easing, but rather as a recalibration to align the benchmark policy rate with prevailing market conditions,” Oluwayemisi Sunmola, Sub-Saharan Africa banking research analyst at Vetiva Capital Management, told PREMIUM TIMES.

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“By addressing the disconnect between the MPR and market rates, the recalibration strengthens monetary policy transmission and provides a clearer framework for pricing financial assets,” he went on to say.

Matilda Adefalujo, an investment research analyst at Meristem Securities, expects OMO bills to trend toward treasury bills and bonds, both of which have seen declines in average yields in the thin secondary market since the rate-cut announcement.

She is upbeat, nevertheless, that the rate on OMO bills will not fall as sharply as those on bonds and treasury bills have, given the need to maintain a premium to incentivise foreign portfolio investors to enter the market and help increase accretion to external reserves.

“That is going to be helpful for the CBN or the monetary authority to intervene in the FX market and help to sustain the stability of the naira that we’ve already started to see,” Ms Adefalujo told PREMIUM TIMES.

She sees the rate reduction as an opportunity for the government to borrow at lower rates so that when inflation spikes and rates go back up, it will have already secured funding at lower costs.