A bold contrarian move
The Central Bank of Nigeria (CBN) shocked markets on September 22 with a 350 basis points (bps) cut in its benchmark interest rate, from 26.5 percent to 23 percent. This was far beyond expectations of either a rate hold or a modest reduction. The decision stands in contrast to major central banks worldwide, which have been hiking rates in response to inflation spikes driven by the crisis in the Straits of Hormuz and rising energy costs.
The CBN’s Monetary Policy Committee explained that inflation stabilization and the need to align benchmark rates with actual market yields justified the move. They described it as a “reset and recalibration,” arguing that conventional signaling through modest adjustments had lost effectiveness.
Nigeria’s unique economic context
Unlike many economies battling surging inflation, Nigeria’s data point, in a different direction:
- Inflation is trending down, currently at 15.39%.
- Foreign reserves are rising, now above $55 billion.
- Fixed income yields are softening.
The Middle East crisis has boosted Nigeria’s reserves through strong oil prices, while domestic petrol price increases have not been severe enough to reignite inflation pressures.
Risks on the horizon
Despite these positives, risks remain:
- Inflation resurgence: Excess liquidity, especially during election campaigns, could push prices higher.
- Foreign portfolio exits: Investors attracted by Nigeria’s high yields may shift funds elsewhere as global rates rise.
- Liquidity surge: Seasonal spending and campaign financing could destabilize monetary conditions if not absorbed productively.
Strengths that cushion the risks
Nigeria’s external position provides resilience:
- FX reserves above $55 billion offer a buffer against capital flight.
- Diaspora remittances, close to $1 billion monthly, strengthen inflows.
- The FTSE Russell reclassification of Nigeria’s stock market to frontier status is attracting new portfolio investments.
- Strong oil prices continue to support external balances.
Together, these factors suggest Nigeria can withstand potential outflows without triggering a currency crisis. This is why this is the best time to make this rate cut.
Opportunities for growth
The CBN’s rate cut opens several opportunities:
- Stimulating growth: Lower rates can accelerate economic activity, crucial for lifting millions out of poverty. Our current growth rate is too tepid, we need to accelerate it. We should seek to outgrow inflation, and not wait to completely tame inflation, to stimulate growth.
- Stock market boost: Equities typically respond positively to easing, and early signs of investor enthusiasm are evident.
- Debt servicing relief: Reduced borrowing costs free fiscal space for infrastructure and social programmes.
- Bank lending expansion: With the Standing Lending Facility cut to 23.5 percent and the Standing Deposit Facility to 20 percent, banks are encouraged to lend more to manufacturers and real economy businesses.
Strategic implications
The CBN’s contrarian stance is a calculated gamble. By prioritising growth over inflation containment, it seeks to channel liquidity into productive sectors rather than speculative activity. Success depends on banks extending credit to the real economy and government using fiscal savings wisely.
Nigeria’s current balance of payments position, supported by strong reserves and stable inflows, provides the foundation for this bold move. If managed well, the opportunities outweigh the risks.
The CBN’s surprise rate cut signals a new phase in Nigeria’s monetary policy. With inflation moderating, reserves strong, and external flows stable, the timing is favourable. The challenge lies in execution: ensuring liquidity drives real growth and cushions the poor from economic hardship. Lower interest rates can be the catalyst Nigeria needs, if the momentum is harnessed effectively.
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Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com and marketconversations.substack.com
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