The Central Bank of Nigeria (CBN), on Tuesday, cut its benchmark interest rate- the Monetary Policy Rate (MPR) to 23%, the lowest level in 31 months, while overhauling the framework around it in a bid to reconnect monetary policy with rates in the money market, and not an easing of its restrictive stance.
The CBN’S Monetary Policy Committee (MPC) cut the monetary policy rate from 27.5% and recalibrated its standing facilities corridor to +50/-300 basis points around the MPR at its Sept. 21-22 meeting in Abuja.
It kept cash reserve requirements unchanged at 45% for deposit money banks, 16% for merchant banks and 75% for non-TSA public-sector deposits.
Olayemi Cardoso, CBN governor, said the more significant issue behind the decision was a disconnect between the policy rate and the rates at which banks were actually trading, which had weakened the transmission of monetary policy through the financial system.
‘We have a firm belief that it is not working as effectively as it should,’ Cardoso said of the transmission mechanism during a press briefing after the meeting. ‘The rates at which the interbank is working are disconnected from the MPR. And there’s a need to fix that.’
The recalibration is intended to restore the MPR as the principal signal of monetary policy as the CBN moves toward an inflation-targeting framework.
Cardoso said the latest move should not be viewed as a signal that the central bank is abandoning its restrictive stance. Rather, the bank wants its policy settings to work more effectively now that the economic environment is more stable.
The move marks an effort to address a technical problem that had become increasingly important as the CBN sought to make its monetary-policy framework more market-driven.
A policy rate is most effective when changes in it are transmitted to borrowing costs and other market rates. The CBN said the divergence between the MPR and prevailing market rates had weakened that link.
Cardoso said the decision was possible because the economic backdrop has changed substantially following a period of aggressive monetary tightening. Inflation has moderated, the foreign-exchange market has stabilised, and external buffers have strengthened, giving the central bank greater room to repair the mechanics of monetary policy without abandoning its focus on price stability.
‘Fundamentals have changed,’ Cardoso said. ‘We are at macroeconomic stability.’
Headline inflation slowed to 15.39% in August from 15.43% a month earlier, while food inflation fell to 19.57% from 20.31%. Core inflation declined to 13.29% from 14.97%. On a month-on-month basis, headline inflation eased to 0.71% from 1.57%.
The 12-month moving average of headline inflation also fell to 16.30% in August from 16.89% in July, extending its decline to 20 consecutive months.
The economy is also expanding at a faster pace, as real gross domestic product grew 4.43% in the second quarter from 3.89% in the first, with growth accelerating in both the oil and non-oil sectors. The oil sector expanded 7.31%, while non-oil growth rose to 4.31%. Cardoso said the CBN’s projection is that domestic output will likely remain resilient through the rest of the year.
The policy reset comes as the central bank continues to repair its monetary-policy operating framework. The governor said the adoption of
Nigerian Overnight Financing Rate (NOFA) as a transaction-based operational benchmark has improved transparency in money-market operations and should help align policy implementation more closely with market conditions.
‘This is a reset and a recalibration. That is all it is,’ he said.
MPC also sees inflation continuing to moderate in the short to medium term, helped by exchange-rate stability, the lagged impact of previous tightening and improving food supplies during the harvest season. It flagged prolonged geopolitical tensions in the Middle East and election-related spending as risks to the inflation outlook.
The committee also pointed to stronger external and fiscal-monetary coordination. Nigeria’s balance-of-payments surplus widened to $3.51 billion in the second quarter from $2.38 billion in the first, while the current-account surplus rose 67.9% to $7.54 billion from $4.49 billion.
Gross foreign reserves stood at $55.25 billion as of Sept. 18, the highest level in 18 years and enough to cover about 11.3 months of imports of goods and services.
The CBN also cited stronger banks following the completion of its recapitalisation program, saying higher capital buffers should improve the industry’s capacity to finance longer-term investment.
Global risks, however, remain a concern, especially as global growth is expected to slow to 3% this year from 3.5% in 2025, with the Middle East conflict, trade-policy uncertainty and elevated energy prices weighing on the outlook. Renewed geopolitical tensions could also delay the normalisation of monetary policy globally.
For Nigeria, Cardoso said the improvement in stability was central to the timing of the reset, after earlier policy measures had helped reduce pressure on the foreign-exchange market and improve investor confidence.
‘It couldn’t be a better time to do it than now, when things are stable,’ he stressed.
According to him, the CBN will assess the effectiveness of the recalibrated corridor in strengthening policy transmission, with future decisions remaining data-dependent.
In his reaction after the policy announcement, Uche Uwaleke, a financial economist and capital-market professor at Nasarawa State University, Keffi, said the MPC’s decision was justified by the improving macroeconomic environment.
He cited moderating inflation, exchange-rate stability, improved foreign-exchange market liquidity and the accumulation of external reserves as factors supporting the rate cut.
Uwaleke also pointed to the recently signed memorandum of understanding between the finance minister and the CBN governor on fiscal and monetary policy coordination as a positive development.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), also welcomed the recalibration, saying it was timely given the improving inflation trajectory and the cost of maintaining a highly restrictive monetary environment.
Yusuf, however, said the key test would be whether the lower policy rate translates into cheaper credit for businesses, noting that high financing costs have constrained investment, working capital and job creation.
He said banks should progressively reflect the new policy environment in lending rates, while warning that the CBN would need to manage potential exchange-rate and portfolio-flow risks as interest-rate differentials narrow.
He added that lower interest rates alone would not resolve Nigeria’s structural inflation pressures, pointing to energy costs, logistics bottlenecks, insecurity, food-production constraints and infrastructure deficits as issues requiring complementary fiscal and structural reforms.