How cut in interest rate will stimulate economy, by experts

Experts and business leaders have described yesterday’s benchmark interest rate cut of the Cental Bank of Nigeria (CBN) as a major step towards driving economic growth, boosting employment and widening the gains of macroeconomic reforms on the citizens.

After its two-day Monetary Policy Committee (MPC) meeting, the CBN shifted to a new phase of its macroeconomic development agenda with reduction of the benchmark interest rate by 50 basis points, the first rate cut in two years.

It reduced Monetary Policy Rate (MPR) by 50 basis points (bps) from 27.50 per cent to 27 per cent.

The MPC also adjusted other monetary parameters. The Standing Facilities corridor around the MPR was narrowed from +500bps/-100bps to +250/-250 bps. The Cash Reserve Ratio (CRR) for commercial banks was reduced from 50 to 45 per cent, while that of merchant banks was retained at 16 per cent. The Liquidity Ratio was kept unchanged at 30 per cent.

In addition, the MPC introduced a 75 per cent CRR on non-Treasury Single Account (TSA) public sector deposits. This measure requires commercial banks holding government funds outside the TSA to keep three-quarters of such deposits with the CBN.

The CBN’s decision came on the heels of many reports that showed stability in the macroeconomic outlook, with sustained disinflation, above-average economic growth and foreign exchange (forex) inflows.

Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the CBN’s decision marked “a significant policy shift toward supporting growth and investment, following an extended period of aggressive monetary tightening to rein in inflation”.

According to him, having restored a measure of macroeconomic stability and slowed inflationary pressures, the MPC’s pivot toward growth is logical and timely.

He noted that high interest rates have significantly constrained private sector credit, increased the cost of funds, and weighed on business expansion.

“By lowering the MPR and CRR, the CBN is deliberately working to improve liquidity conditions, reduce borrowing costs, and unlock capital for productive sectors of the economy.

“The combination of lower MPR and reduced CRR should expand banks’ capacity to create credit, lowering lending rates and making financing more accessible for businesses, especially small and medium enterprises (SMEs). Lower cost of funds will encourage new investments, support business expansion, and enhance capacity utilisation in the real sector. This will, ultimately, stimulate output growth and job creation.

“A more accommodative monetary environment will enable banks to fulfill their core function of mobilising savings and channelling them into productive investments, reinforcing financial deepening and economic growth. The decision to impose a 75 per cent CRR on non-TSA public sector deposits is a prudent measure to prevent excessive fiscal-driven liquidity injections from destabilising the financial system,” Yusuf said.

He stressed the need for complementary fiscal measures, noting that while monetary easing is a welcome development, fiscal policy must play a complementary role to fully unlock growth potential.

Announcing the outcome of the September MPC meeting in Abuja, CBN Governor Olayemi Cardoso said the change in policy stance was based on review of macroeconomic developments.

According to him, the decision by the MPC to ease the policy stance was made in the light of improving inflation trends.

“The committee’s decision to lower the monetary policy rate was predicated on the sustained disinflation recorded in the past five months, projections of declining inflation for the rest of 2025 and the need to support economic recovery efforts,” Cardoso said.

Cardoso explained that the introduction of new measures was aimed at strengthening monetary control, improving liquidity management, and reinforcing the TSA regime.

He noted that the country’s gross external reserves rose to $43.05 billion as of September 11, thus providing an import cover of 8.28 months.

He attributed the rise to improved forex inflows, which underlined increasing investor confidence in the national economic outlook.

“It has been on an upward trajectory. And honestly, as far as I can see, the measures that we’ve used to get to where we’ve got to and to be able to talk about a foreign reserves position that was the highest since 2019, we will continue to deploy,” Cardoso said in relation to the forex reserves.

He pointed to initiatives, such as the Non-Resident BVN (NRBVN) scheme, which has boosted foreign inflows.

He said: “When we started that journey, it was basically $200 million per month. We doubled it in no time, and now going into next year, we are saying we are going to attain $1 billion. And we will do it”.

Responding to questions about how monetary and fiscal authorities plan to sustain the disinflationary trend in the run-up to the 2026 pre-election year, Cardoso said both institutions remain committed to working together to deliver single-digit inflation.

“Our goal is for single digit. That’s our goal. And that is something that we are resolute on. We will not stop until we get there,” Cardoso said.

Cardoso stressed that the MPC’s approach would remain data-driven and proactive in responding to domestic and external risks.

He emphasised the importance of exchange rate stability and fiscal discipline in sustaining recent gains.

He noted that the CBN and the Ministry of Finance have intensified collaboration in recent months, noting that without the Ministry of Finance collaborating with the bank, it would not have got to where it has got.

On the economic outlook, Cardoso said projections suggest a sustained decline in inflation in the coming months, supported by previous rate hikes, foreign exchange market stability, lower petrol prices, and increased food supply from the harvest season.

He said: “The onset of the harvest season is expected to increase local food supply, moderate food prices and contribute to the overall decline in inflation”.

Finance and economy experts said the decision of the CBN sent a positive signal on the overall outlook of the economy.

Other financial experts, who spoke on the CBN action, include Managing Director of AIICO Capital, Dr. Femi Ademola. He said reduction in the benchmark interest rate was not unexpected as all parameters pointed to the need for monetary easing.

He said CBN’s decision could lead to stronger performances in the financial market, stronger profits from banks attracting investors and helping their recapitalisation efforts.

He said: “The rate cut will have instant impact on the financial markets as instruments are reprised, including lending rates to the real sector of the economy. Lower benchmark would lead to lowering yields of fixed income instruments and more profits for investors. Low lending rates could also improve borrower’s capacity to repay and thus boost banks’ earnings while reducing non-performing loans (NPLs)”.

Managing Director of GTI Capital, Mr. Kehinde Hassan, said the decision of the CBN would make credit more affordable for businesses and households, which could stimulate investment and consumption.

“This combination of measures may be viewed by investors as a sign of improving macroeconomic stability, potentially strengthening confidence in Nigerian assets.

“Higher capital buffers enhance banks’ resilience to economic and foreign exchange volatility, while stronger balance sheets expand their capacity to finance large-scale infrastructure, energy, and industrial projects. Successful recapitalisation also reassures investors and rating agencies about the stability of Nigeria’s financial system,” Hassan said.

He, however, noted the need for other banks to step up their recapitalisation efforts as smaller banks that struggle to meet the thresholds may lose market share or face mergers and acquisitions, leading to a more concentrated yet potentially more stable banking sector.

Chairman of Nigeria Economic Summit Group (NESG), Mr. Niyi Yusuf, said the bank’s decision was “a cautious response” to the five-month reduction in inflation.

He said: “It was a delicate balancing act by the CBN in response to the expectations by the private sector of monetary policy ease to enable access to credit and at lower and more affordable rates. However, while inflation is reducing, forex rate is stable and our foreign reserves have increased to $43 billion, representing highest level since 2019, there is still a few things to watch out for – food inflation, which is not reducing; potential excess liquidity from increased FAAC allocation; and increased consumer spending during end of year festivities, all of which can undermine the CBN’s disinflation efforts if not counterbalanced by tighter monetary conditions and appropriate fiscal measures.

“The bank recapitalisation that will end in March 2026 is also increasing money in the banking sector that will be available for lending to consumers so that banks can provide improved return on investment (ROI) to investors. This new capital in the banking sector can also lead to higher inflation if not matched by increased productivity, especially in 2026 where we expect intense political activities and higher political spending on campaigns ahead of 2027 general election. Hence, MPC’s cautious stance, which we witnessed at its 302 meeting in September”.

Analysts at Arthur Steven Asset Management said the MPC decision was a notable policy inflection, with early signs of macroeconomic stabilisation, falling inflation, improving GDP, rising reserves, and a stronger naira.

“While risks remain, the easing stance introduces a cautiously optimistic tone across sectors, especially if followed by fiscal and structural alignment,” Arthur Steven said.

Managing Director of Highcap Securities, Mr David Adonri, called for caution, noting that there were still many downside risks to the disinflationary trend.

According to him, while the relaxation of monetary policy was no doubt data driven, the threats that elicited the contractionary monetary policy remain strong.

“Rural insecurity and volatility of commodity prices are still hanging over the economy like an albatross. The situation is further complicated by huge fiscal expansion which the governor alluded to in his report. When, coupled with the expansionary monetary policy as announced, I doubt if the policy measure will not backfire because of excessive macroeconomic liquidity. It is quite encouraging that due to the continued tightness of monetary policy, the impact on inflation had been positive. Perhaps, more persistence and patience in applying the contractionary monetary policy could have taken inflation rate to single digit wherein one can safely say that the tight monetary policy goal had been achieved. Only time will tell whether or not this policy decision is hasty and premature,” Adonri said.

Managing Partner, Biodun Adedipe & Associates, Dr Biodun Adedipe said the CBN rate cut was a signal of what to expect if disinflation continues.

He said: “It is appropriate response to the macroeconomic stability and less vulnerable external sector. It is unlikely to result in any worthwhile reduction in banks’ lending rates, but a message to the banks, their customers and other stakeholders of what to expect if inflationary pressures further ease. The cut is not deep enough to rattle global investors and I therefore see no worries about foreign portfolio investors (FPIs)”.

He added that the recapitalization was progressing well, with the process expected to become more intense towards end of the year and in first quarter 2026 towards the deadline. “Banks that can’t make the minimum amount for their current authorization will seek mergers and acquisitions deals, and possible license downgrade. I don’t see any liquidation this time around, unlike at the end of the 2004-2005 recapitalisation exercise,” Adedipe said.

The Nigeria Employers’ Consultative Association (NECA) has commended the Central Bank of Nigeria (CBN) for reducing the Monetary Policy Rate (MPR), while warning about potential limitations of the decision.

NECA Director-General, Mr Adewale-Smatt Oyerinde, stated Tuesday in Abuja that the modest rate cut must translate into real economic benefits for households and businesses across Nigeria to have meaningful impact.

At its 302nd meeting, the Monetary Policy Committee (MPC) lowered the MPR by 50 basis points to 27 per cent and introduced new measures on cash reserve and liquidity requirements.

Oyerinde noted inflation had steadily declined, with headline inflation dropping to 20.12 per cent in August from 21.88 per cent in July, based on data from the National Bureau of Statistics.

“For over five months, inflationary pressures have eased.

“This provides critical space for policymakers to balance price stability with the urgent need to stimulate real economic growth,” Oyerinde said.

He warned that the impact of the rate cut would depend on effective transmission mechanisms.

He said without this, the intended boost to credit access and economic expansion might not materialise.

“If credit costs are lowered, businesses can access financing, expand operations, and create jobs.

“However, high cash reserve ratios may continue to constrain lending and undermine these expected outcomes,” he said.

In spite of overall inflation easing, Oyerinde highlighted that food inflation remained persistently high, putting pressure on household budgets and eroding the disposable income of average Nigerian families.

“Macroeconomic stability only becomes meaningful when Nigerians feel tangible relief, especially through lower food and living costs,” he emphasised, urging deeper economic reforms beyond monetary policy adjustments.

Oyerinde called on the government to complement monetary actions with fiscal reforms addressing exchange rate instability, insecurity in farming communities, and inefficiencies in energy and transport infrastructure.

“It is time to complement price stability with deliberate growth stimulation.

“This is the message Nigerians need right now to find relief from the ongoing cost-of-living crisis,” Oyerinde said.

Nigeria’s Gross Domestic Product (GDP) grew by 4.23 per cent in real terms in the second quarter of 2025 as broad improvements across key sectors of the economy pushed the nation’s productivity above average projections.

The National Bureau of Statistics (NBS) in its “Q2 2025 GDP Report” reported that the economy further expanded in the second quarter with a real GDP growth of 4.23 per cent, 110 basis points above 3.13 per cent recorded in first quarter 2025 GDP. GDP had risen by 3.48 per cent in corresponding second quarter of 2024.

Source; The Nation News