Nigeria’s central bank has opened a new chapter in its monetary policy playbook, cutting its benchmark interest rate for the first time in five years and signalling a gradual pivot from a long spell of tightening to a more balanced stance aimed at sustaining disinflation, stabilising the naira, and boosting investor confidence.
The Monetary Policy Committee (MPC), after its 302nd meeting in Abuja on September 23, lowered the Monetary Policy Rate (MPR) by 50 basis points to 27 percent. The modest cut, though cautious, marks the first tangible shift from aggressive tightening since 2020.
“Nigeria’s move, analysts say, is part of a global shift from aggressive tightening to a cautious easing cycle as inflation cools and economies adjust to post-pandemic normalisation.”
The decision underscores confidence in recent macroeconomic gains—slowing inflation, stronger foreign exchange inflows, and a resilient external reserve position—that have allowed policymakers to begin a controlled easing cycle without jeopardising price stability.
Governor Olayemi Cardoso, unveiling the Committee’s decisions, said the policy adjustment reflects the improving inflation outlook and a broader macroeconomic environment that supports credit growth and private sector expansion.
“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,” he said.
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The move, which also adjusted the Standing Facilities corridor around the MPR to a +250/-250 basis points and raised the Cash Reserve Requirement (CRR) for commercial banks to 45 percent, comes as the Central Bank continues its cautious transition from unorthodox to orthodox policy frameworks. The MPC retained the CRR for merchant banks at 16 percent and kept the liquidity ratio unchanged at 30 percent.
A calculated pivot
For much of the past two years, Nigeria’s monetary policy has been dominated by aggressive rate hikes aimed at taming inflation that peaked above 28 percent in early 2024. But the landscape has shifted dramatically. Headline inflation dropped to 20.12 percent in August from 21.88 percent in July, marking the fifth consecutive month of decline, according to the National Bureau of Statistics (NBS).
The naira, which had come under severe pressure in 2023, has appreciated steadily, trading at an average of N1,530 per dollar in early September, supported by a 26 percent year-on-year increase in foreign exchange inflows and the bank’s disciplined FX management.
With these gains, the MPC judged there was sufficient policy space to ease monetary conditions slightly and support the real economy, particularly credit access for businesses. “The stability in the macroeconomic environment offered some headroom for monetary policy to support economic recovery,” the Committee said in its communiqué.
Analysts say the 50 bps rate cut—though modest—was symbolic, breaking a cycle of relentless tightening and signalling a forward-looking approach under Cardoso’s leadership.
“By lowering the benchmark rate, the MPC made a modest but meaningful move,” said Bukola Bankole, partner & corporate finance expert at TNP. “For businesses already borrowing at rates above 30 percent, this adjustment will not ease financing costs immediately, but it signals recognition that growth cannot be perpetually stifled in the name of inflation control.”
The decision aligns with global trends. The U.S. Federal Reserve lowered its benchmark rate in September by 25 bps, citing labour market concerns. The Bank of England also trimmed rates in August to 4 per cent amid slowing growth, while the European Central Bank held steady after cumulative cuts earlier in the year.
Nigeria’s move, analysts say, is part of a global shift from aggressive tightening to a cautious easing cycle as inflation cools and economies adjust to post-pandemic normalisation.
Investor confidence and FX stability
Perhaps the most significant backdrop to the MPC’s pivot is the sustained stability in the foreign exchange market. The naira has remained relatively firm for weeks, bolstered by increased dollar liquidity and the Central Bank’s decisive actions to sanitise the FX market. Inflows have been buoyed by improved oil production, stronger export earnings, and steady remittances.
Cordros Securities analysts said the MPC’s actions will further reinforce investor confidence. “The Committee considered recent global shifts toward monetary easing and the prospect of further policy accommodation. This should be positive for capital flows into emerging and frontier markets, including Nigeria, adding an additional layer of support to engender continued exchange rate stability,” they wrote in a post-meeting note.
For the CBN, sustaining FX stability remains a central pillar of its strategy. “The Committee acknowledged the continued stability of the foreign exchange market and its critical importance in achieving rapid disinflation,” the communiqué stated, urging the Bank to continue implementing policies that boost capital inflows and deepen FX liquidity.
Cardoso echoed this view, emphasising that stability in the FX market is essential to sustaining investor confidence. “As we shift from unorthodox to orthodox monetary policy, the CBN remains committed to restoring confidence, strengthening policy credibility, and staying focused on its core mandate of price stability,” he said.
Managing disinflation and growth
The CBN’s decision to ease policy is supported by data showing a clear downward trend in inflation. The deceleration has been underpinned by several factors—exchange rate stability, moderation in fuel prices, increased agricultural supply during the harvest season, and a stronger current account balance.
Food inflation, a persistent driver of Nigeria’s headline rate, also declined both on a year-on-year and month-on-month basis, offering further comfort to policymakers. “This easing in food inflation is a positive signal for the MPC,” said Ifeanyi Ubah, head of research at Commercio Partners. “It gave the MPC greater confidence to implement a rate cut.”
The Bank, however, remains cautious. While inflation has slowed, the MPC flagged the build-up of excess liquidity in the banking system, driven largely by higher fiscal disbursements, as a potential risk to macroeconomic stability. To counter this, it widened the standing facilities corridor and imposed a 75 percent CRR on non-Treasury Single Account public sector deposits.
“This adjustment is meant to strengthen liquidity management and reinforce the TSA regime,” Cardoso explained. “The goal is to maintain balance—supporting growth without undermining stability.”
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Evolving policy framework
The latest policy actions reflect a broader strategic recalibration at the Central Bank. Since assuming office, Cardoso has pledged to restore orthodox monetary management and strengthen the Bank’s credibility. The CBN is moving toward a formal inflation-targeting framework, aligning with international best practice.
During the Monetary Policy Forum held earlier this year, Cardoso reiterated that the CBN’s primary focus is to sustain price stability and restore purchasing power. “Managing disinflation amidst persistent shocks requires not only robust policies but also coordination between fiscal and monetary authorities to anchor expectations and maintain investor confidence,” he said.
The Bank has also taken steps to fortify the financial system. New minimum capital requirements for banks, effective March 2026, aim to ensure resilience and position the sector for Nigeria’s $1 trillion economy ambition.
“The reforms and policy decisions are part of a coordinated effort to strengthen monetary control, improve liquidity management, and create an enabling environment for inclusive economic growth,” Cardoso noted.
Market reactions and outlook
Investors and analysts welcomed the MPC’s decision as a positive signal, though many stressed the importance of consistency and communication. “This cut could truly mark the beginning of a more sustainable policy mix that supports growth without abandoning the fight for price stability,” said TNP’s Bankole. “But without predictable policy, stronger fiscal alignment, and structural reforms that address the root causes of inflation, this move will remain largely symbolic.”
Bismarck Rewane, managing director of Financial Derivatives Company, expects the easing cycle to extend into the festive season. “The remainder of 2025 appears poised for stronger performance, with foreign currency inflows and stable commodity prices providing support,” he said. “The naira should remain stable around N1,500–N1,550 per dollar, and headline inflation could ease to 20 percent. The MPC is also likely to cut rates again in November, sustaining optimism into the festive season.”
Rewane noted that the rate cut will marginally reduce the government’s debt service burden while keeping yields attractive enough to sustain foreign portfolio inflows. That balance, analysts say, will be critical as Nigeria continues to rely on offshore participation to deepen liquidity and stabilise its currency.
Cordros analysts shared similar optimism. “We expect the Committee to remain cautious, balancing growth-supportive measures with its core mandate of maintaining price stability,” they said. “Monetary easing will likely be carefully calibrated to ensure that interest rates remain competitive enough to attract capital inflows and anchor inflation expectations.”
Global context and domestic risks
The CBN’s pivot comes as central banks across major economies weigh the delicate balance between cooling inflation and avoiding recession. In the U.S., the Fed’s September rate cut reflected a shift in focus from inflation risks to rising unemployment. In the U.K., the Bank of England paused after one cut, citing subdued growth but lingering inflation pressures. The European Central Bank, too, opted for caution, keeping rates steady in September after a cumulative 100 bps easing earlier in the year.
Nigeria’s challenge, however, remains uniquely structural. Inflation is largely cost-push, driven by exchange rate pass-through, high energy costs, and supply chain disruptions rather than excessive demand. These factors limit the efficacy of monetary tightening as a sole inflation-fighting tool. Hence, the MPC’s gradual easing reflects recognition that the path to sustained stability requires coordination between fiscal and monetary authorities.
While the rate cut is expected to support credit expansion and investment, economists warn of potential headwinds. Excess liquidity from fiscal releases, volatile oil revenues, and external shocks could complicate monetary transmission. Yet, for now, the policy direction suggests cautious optimism.
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The road ahead
With inflation easing and the naira strengthening, Nigeria’s monetary authorities are entering a critical phase—one that tests whether gradual easing can reinforce growth without reigniting inflationary pressures. The MPC’s credibility, communication, and consistency will be pivotal in shaping investor sentiment and sustaining FX stability.
The CBN’s bet is that the recent disinflation trend and stable currency will persist long enough to justify further rate cuts, unlocking cheaper credit and stimulating investment. “The real test”, said Bankole of TNP, “is whether inflation continues to ease and whether the naira can achieve meaningful stability.”
For now, the signals are encouraging. Foreign exchange inflows are rising, oil output is improving, and consumer sentiment is recovering modestly. December’s traditionally active spending season, driven by diaspora remittances, tourism, and festive activities, could provide further support for growth.
But as Cardoso himself acknowledged, achieving durable macroeconomic stability requires sustained vigilance. “Our focus must remain on price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship,” he said.
As Nigeria’s central bank charts its way through a delicate policy transition, investors are watching closely. The easing cycle, however modest, represents both a policy recalibration and a confidence signal—one that could define the trajectory of Africa’s top crude producer in the year ahead.
