Going for Growth

Nume Ekeghe

The  Central Bank of Nigeria (CBN) this week took a decisive, though carefully measured, step towards recalibrating its monetary stance.

After 15 months of aggressive tightening aimed at taming runaway inflation and stabilising the naira, the Monetary Policy Committee (MPC) voted to cut the benchmark interest rate by 50 basis points to 27 per cent.

The move, while modest, carries significant symbolic weight. It signals the Bank’s growing conviction that inflationary pressures are decisively easing, the foreign exchange market has regained stability, and the economy can now absorb policies more supportive of growth.

 Governor Olayemi Cardoso, who has presided over a challenging but transformational phase in Nigeria’s monetary policy history, justified the easing on the back of five consecutive months of disinflation. Headline inflation moderated to 20.12 per cent in August, down from 21.88 per cent in July, with both food and core components recording steady declines.

The CBN attributed this trend to a cocktail of factors: earlier rate hikes, exchange rate stability following FX reforms, improved capital inflows, and better domestic crude oil production.

“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. The MPC also adjusted the Standing Facilities corridor to improve the efficiency of the interbank market and strengthen monetary policy transmission.

“The Committee further introduced a 75 per cent CRR on non-TSA public sector deposits for enhanced liquidity management, Cardoso said.

A Break from Hawkish Mode

The Committee’s decision to cut the monetary policy rate rested on five consecutive months of disinflation, a firm outlook for further moderation in price pressures through the rest of 2025, and the imperative of boosting economic recovery.

True to his word and consistent with his upright stance, Cardoso had on numerous occasions stated that once inflation showed clear signs of tapering, he would begin to ease monetary conditions. Yesterday’s move underscores that pledge. In tandem, the MPC adjusted the Standing Facilities corridor to improve the efficiency of the interbank market and sharpen monetary policy transmission.

To reinforce liquidity management, the Committee also introduced a 75 per cent Cash Reserve Ratio (CRR) on non-TSA public sector deposits.

He added: “The MPC expressed satisfaction with the prevailing macroeconomic stability, evidenced by the improvements in several indicators. These include the sustained disinflation, improved output growth, stable exchange rate and robust external reserves.

“It particularly noted the increased momentum of disinflation in August 2025, being the highest in the past five months. This deceleration, underpinned by monetary policy tightening, exchange rate stability, increased capital inflows, and surplus current account balance, have helped to broadly anchor inflation expectations.

“Other factors that contributed to the deceleration include the continued moderation in the price of Premium Motor Spirit (PMS) and the notable increase in crude oil production. In the view of the Committee, the stability in the macroeconomic environment offered some headroom for monetary policy to support economic recovery.”

Liquidity Risks Still Loom

That said, the communique was quick to caution against complacency. The MPC acknowledged a persistent build-up of excess liquidity in the banking system, driven largely by fiscal injections from improved government revenues.

To counter this, it introduced a punitive 75 per cent CRR on non-TSA public sector deposits, while adjusting the CRR for commercial banks to 45 per cent. The liquidity ratio was left unchanged at 30 per cent.

The widening of the Standing Facilities corridor to +250/-250 basis points is another important signal.

By loosening the corridor, the CBN aims to revive interbank market activity and strengthen the transmission of monetary policy into the broader economy. Weak transmission has long been a structural flaw in Nigeria’s financial system, where policy intentions often fail to translate into meaningful changes in credit conditions.

Cardoso further stated: “Notwithstanding the consistent deceleration in inflation, the Committee observed the persistent build-up of excess liquidity in the banking system, resulting largely from fiscal releases emerging from improved revenues.

“Being mindful of the need to preserve the prevailing macroeconomic stability, the MPC noted the risk posed by excess liquidity in the banking system.”

 The Chief Executive Officer Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf commenting on excess liquidty, said: “The decision to impose a 75 percent CRR on non-TSA public sector deposits is a prudent measure to prevent excessive fiscal-driven liquidity injections from destabilizing the financial system.”

Echoes of Global Trends

The CBN’s shift aligns with a broader recalibration in global monetary policy. Central banks in advanced economies, notably the US Federal Reserve and the European Central Bank, have recently slowed or paused their tightening cycles as inflation moderates. The Bank of Canada and even the Bank of England have adopted more dovish tones, while countries like Brazil and Chile have already begun cutting rates.

 In emerging markets, the logic is similar: having frontloaded rate hikes to anchor expectations, policymakers are now cautiously shifting toward supporting growth.

For Nigeria, the case is particularly compelling. Unlike advanced economies, where inflation has largely been supply-driven, Nigeria’s inflation mix has been heavily influenced by exchange rate pass-through and energy prices. With reforms in those sectors beginning to take hold, the MPC judged that the time was ripe to ease slightly.

 Cardoso added: “Global inflation is projected to sustain its deceleration, albeit at a slower pace, due to the impact of trade tariffs and other structural challenges.

“This trajectory has necessitated a cautious and data-dependent approach to monetary policy easing by central banks, especially in emerging markets and developing economies.”

Gains from Reforms and Recapitalisation

The rate cut also comes against the backdrop of significant structural reforms in Nigeria’s financial system. The ongoing bank recapitalisation exercise has seen 14 institutions fully meet new capital thresholds ahead of the March 2026 deadline. The MPC noted that this has strengthened financial soundness indicators, bolstered risk management, and enhanced resilience against shocks.

 The termination of forbearance on single obligors, though initially controversial, has promoted greater transparency and discipline in credit allocation. Analysts argue this is crucial in positioning the sector for long-term stability.

 Meanwhile, FX reforms continue to yield dividends. By dismantling multiple exchange rate windows and enforcing greater transparency, the CBN has attracted higher portfolio inflows, restored confidence among foreign investors, and eased speculative pressures on the naira.

Combined with rising crude production, these reforms have helped replenish reserves and provide the policy space to consider easing.

He added: “On the financial sector, the MPC noted the continued resilience of the banking system, with most of the financial soundness indicators remaining within their respective prudential benchmarks.

“Members also acknowledged the significant progress in the ongoing bank recapitalisation exercise, as 14 banks have fully met the new capital requirement. They therefore urged the Bank to continue the implementation of policies and initiatives that would ensure the successful completion of the ongoing recapitalisation exercise.

“The Committee further noted the successful termination of forbearance measures and waivers on single obligors, which has helped to promote transparency, risk management and long-term financial stability in the banking system.

“The MPC reassured the public that the impact of the removal of forbearance is transitory and does not pose any threat to the soundness and stability of the banking system.”

 Balancing Growth and Price Stability

 For small and medium enterprises (SMEs), access to affordable credit remains a major hurdle. Yet, the symbolism of the cut matters. It signals to markets, investors, and businesses that Nigeria has turned a corner from the instability of the past two years. It also aligns monetary policy with the federal government’s broader growth ambitions, particularly its goal of building a $1 trillion economy by 2030.

Yusuf stated: “The MPC’s decision represents a strategic and well-timed policy shift from a phase of stabilisation to a phase of growth accelerator. If sustained and complemented by appropriate fiscal and structural reforms, these measures will stimulate economic growth and job creation, improve private sector performance and output, boost government revenues through an expanded tax base, and moderate inflation sustainably in the medium to long term.

“The CPPE regards this as a step in the right direction toward building a more resilient, inclusive, and growth-oriented Nigerian economy.”

The Road Ahead

Looking forward, the trajectory of inflation will be critical. The CBN expects continued disinflation, aided by the harvest season, lower petrol prices, and FX stability. The outlook is brighter than it has been in years. If the naira remains steady, capital inflows stay robust, and banks complete recapitalisation smoothly, Nigeria’s macroeconomic environment could be entering a more stable and growth-friendly phase.

 Cardoso, in his closing remarks, captured the cautious optimism: “Staff projections suggest a sustained disinflation over the coming months, driven by the lagged effects of previous rate hikes, continued stability in the foreign exchange market, and decline in the price of PMS. Furthermore, the onset of the harvest season is expected to increase local food supply, moderate food prices and contribute to the overall decline in inflation.

 “In its commitment to achieving the core mandate of price stability, the Committee will remain proactive through a data-driven policy response.”