Onome Amuge

Nigeria has cautiously stepped into the global monetary easing cycle, with the Central Bank of Nigeria (CBN) cutting interest rates for the first time in five years. The Monetary Policy Rate (MPR) was trimmed by 50 basis points to 27 percent, even as the apex bank imposed tougher liquidity controls on public sector funds to guard against inflation.

The decision, announced by Governor Olayemi Cardoso after the 302nd meeting of the Monetary Policy Committee (MPC) in Abuja, marks a turning point in a tightening cycle that began in 2020. Since the pandemic-era reduction to 11.5 percent, the CBN had steadily ratcheted up borrowing costs to 27.5 percent, responding to rising inflation and currency volatility.

Now, with headline inflation easing for five consecutive months to 20.12 percent in August, and the naira stabilising in the foreign exchange market, the CBN believes there is room to cautiously ease policy without reigniting price pressures.

“All 12 members of the committee voted in favour of a 50-basis-point reduction. The decision reflects our confidence in recent macroeconomic improvements, including stable exchange rates, robust external reserves and continued disinflation. But we are equally mindful of the risks of excess liquidity,” Cardoso said. 

In a bid to tighten liquidity even as rates come down, the CBN introduced a 75 percent cash reserve requirement (CRR) on non-Treasury Single Account (non-TSA) public sector deposits. The move is designed to ensure that public sector funds parked in commercial banks do not fuel an unintended credit or spending spree that could undermine disinflation gains.

For deposit money banks, the CRR was cut by 500 basis points to 45 percent, while merchant banks’ ratio was retained at 16 percent. The liquidity ratio remains unchanged at 30 percent. The asymmetric corridor around the MPR was adjusted to +250/-250 basis points to improve monetary transmission.

Analysts described the dual measures, rate cut and liquidity tightening,as a balancing act.

“This is a cautious easing, not a full pivot. The CBN wants to send a signal that growth matters, but it is not letting liquidity get out of hand, especially from the public sector side,” said Abiodun Adebayo, chief economist at a Lagos investment bank. 

The MPC’s dovish tilt is underpinned by stronger macroeconomic data. Nigeria’s real GDP grew by 4.23 percent in the second quarter of 2025, according to the National Bureau of Statistics (NBS), buoyed by both oil and non-oil sectors. Moreso, external reserves are edging close to $42 billion, providing a buffer for monetary and exchange rate stability.

Cardoso said the MPC was encouraged by this momentum. “The Nigerian economy has shown resilience. Our job is to calibrate monetary conditions to consolidate disinflation without derailing growth,” he told journalists.

Business leaders have long argued that the prolonged tightening cycle had stifled credit to the real economy, especially small and medium enterprises (SMEs). Lending rates remained high, often exceeding 30 percent, even as MPR hikes sought to rein in inflation. For them, the cut is a welcome first step.

“The reduction, though small, is significant as a signal. What is needed now is for banks to respond with more affordable credit to businesses. Policy easing must translate into real sector benefits,” said Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE). 

Despite the optimism, challenges persist. Inflation, while easing, is still among the highest in Africa. Food prices, in particular, remain volatile, driven by insecurity in farming regions, high logistics costs, and global commodity fluctuations.

Moreover, Nigeria’s banking sector faces the perennial issue of weak monetary transmission, as changes in MPR often have limited impact on commercial lending rates. Analysts argue that unless banks adjust their pricing, the cut may not materially alter credit conditions for households and firms.

“This is the structural problem of Nigeria’s credit markets. The policy rate is a guidepost, but high risk premiums, weak collateral systems, and heavy CRR debits mean banks still prefer investing in risk-free government securities. The rate cut will not magically change that,” said Adebayo. 

Others worry that the reliance on CRR as a liquidity management tool distorts bank balance sheets. By imposing a 75 percent requirement on non-TSA public sector deposits, the CBN risks further tightening liquidity in some segments of the market, potentially offsetting the growth stimulus from lower MPR.

Nigeria’s shift also comes amid a wave of easing by central banks globally. After years of synchronised tightening, monetary authorities from Brazil to South Africa have begun cutting rates as inflation moderates. The CBN’s move, therefore, aligns Nigeria with global peers while reflecting local realities.

However, analysts warn that Nigeria’s room for manoeuvre is narrower, given its structural inflation drivers and dependence on imports. Unlike advanced economies, monetary easing in Nigeria risks stoking foreign exchange demand and weakening the naira unless carefully managed.