… Eases credit in first rate cut in five years
… Introduces 75% CRR on non-TSA to check excess liquidity
… As 14 banks meet recapitalisation requirements
The Central Bank of Nigeria (CBN) on Tuesday reduced its Monetary Policy Rate (MPR) by 50 basis points to 27 percent from 27.50 percent, the first in five years.
The move reflects a cautious bid to stimulate economic growth while sustaining foreign portfolio investment inflows.
Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), announced the decision at the end of the two-day Monetary Policy Committee (MPC) meeting in Abuja, which was attended by 12 members of the committee.
The committee delivered a set of complementary measures that balanced monetary easing with targeted liquidity controls. In order to stimulate bank lending and support credit to the private sector, the MPC lowered the Cash Reserve Requirement (CRR) for commercial banks to 45 percent, down from 50 percent, while retaining the CRR for merchant banks at 16 percent. However, it introduced a 75 percent CRR on non-Treasury Single Account (TSA) public sector deposits, which serves as a tightening tool to mop up excess liquidity from fiscal injections.
To further strengthen monetary policy transmission, the Standing Facilities Corridor (SFC) was widened to plus or minus 250 basis points around the Monetary Policy Rate (MPR).
Meanwhile, the Liquidity Ratio was held unchanged at 30 percent.
Read also: CBN eases MPR to 27%, first time since 2020
Fourteen banks meet capital requirements
Cardoso further disclosed that 14 banks have fully met the new capital requirements.
He said, “On the financial sector, the MPC noted the continued resilience of the banking system with most of the financial soundness indicators remaining within projected benchmarks.
“Members also acknowledge the significant progress in the ongoing bank recapitalisation exercise, as 14 banks have fully met the new capital requirement.”
He said the committee also noted the successful termination of forbearance measures and waivers on civil obligors, which have helped to promote transparency, risk management, and long-term financial stability in the banking system.
He explained that the impact of the removal of forbearance is transitory and poses no risk to the soundness or stability of the banking system.
Analysts welcome growth moves
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), hailed the policy as timely, given Nigeria’s five consecutive months of declining inflation – an indication that previous tightening measures have yielded results.
He noted that high interest rates in recent quarters constrained private sector credit, increased the cost of funds, and weighed heavily on business expansion.
According to him, the reduction of the MPR and CRR demonstrates the CBN’s deliberate effort to improve liquidity conditions, lower borrowing costs, and unlock capital for productive sectors of the economy.
Yusuf further said that a more accommodative monetary environment would also strengthen financial intermediation, enabling banks to better mobilise savings and channel them into productive investments, thereby reinforcing financial deepening and economic growth.
Yusuf described the MPC’s decision as “a strategic and well-timed policy shift from a phase of stabilisation to a phase of growth accelerator.”
Razia Khan, managing director and chief economist for Africa and the Middle East at Standard Chartered Bank, said the cut was fuelled by August disinflation, while adjustments to the corridor narrowed lending and deposit facility rates to 29.9 percent and 24.5 percent.
She emphasised that “the evolution of CBN’s OMO policy will be a more important indicator of the monetary stance going forward.” Khan added that the CBN sees sustained disinflation in the months ahead as a result of previous policy choices, hinting at the possibility of further easing in the future.
Bismarck Rewane, managing director/CEO of Financial Derivatives Company (FDC), described the meeting as a positive one, characterising the decisions as bold and aggressive. He explained that the introduction of the new CRR on non-TSA public deposits was clearly targeted at sterilising excess liquidity from Federation Account Allocation Committee (FAAC) and Nigerian National Petroleum Company (NNPC) funds.
Read also: CPPE hails CBN’s reduction in MPR, CRR
Lower yields for fixed income instruments
Meanwhile, the rate cut is projected to impact the long-standing era of high returns on fixed-income assets.
Gbolahan Aina, managing director at Cordros Asset Management, said that, leading to the rate cut decision, yields on fixed-income instruments had begun falling.
“So, we are going to see yields fall. It may not be so much in the treasury bills space, but for the bond space, we will see a further downward spiral in yield,” he said.
At last week’s auction, the one-year cleared at 16.78 percent, down from 22.9 percent at the start of the year, while shorter bills dipped to 15.3 percent/15.0 percent from 18.5 percent/ 18 percent in January.
Felicia Owolope, investment research analyst at Meristem, said that the adjustments made by the CBN signalled that it is moving into a dovish stance. This means that the apex bank is now more focused on stimulating economic growth rather than just fighting inflation.
“Yields will drop at first. However, other things can influence them, and once there is more money in the system, the government’s need to borrow money can cause yields to become unpredictable for a short time,” she said.
Omobola Adu, macroeconomist at CSL Stockbrokers, also pointed out that the move to adjust the asymmetric corridor was meant to ensure the proper pricing of liquidity in the interbank market.
“In a case where the corridor wasn’t adjusted correctly, financial institutions and banks would just ignore government securities and play around with the Standing Deposit Facility,” Adu highlighted.
The asymmetric corridor is the rate at which commercial banks can borrow or deposit with the CBN.
The asymmetric corridor was adjusted to +250/-250, from +500/-100 basis points, meaning that it is more attractive for banks to borrow from the CBN at 29.5 percent (MPR+2.5 percent).
Dumebi Oluwole, lead economist at Stears, said that with the new corridor, banks now face trade-offs between placing funds with the CBN or in government securities.
Another area highlighted by analysts is how the rate cut would impact the financial services that have benefited from changes in the regulatory landscape.
“The banks will have more money to trade, and the income they will make from FI trades will be higher. Imagine buying a 10-year bond at 22 percent from the government and selling at 15 percent in the secondary market. That’s a lot of money, as low yield equals higher price and vice versa,” said Efe Ogunnaiya, a Lagos-based portfolio manager.
