After months of hope for easing monetary policy, the Central Bank of Nigeria (CBN) appears to be keeping interest rate cuts on hold for now. This further leaves investors asking what strategies to take for balancing risk and return in short to medium term.
The Monetary Policy Committee (MPC) of the CBN on Tuesday voted to keep the benchmark policy rate unchanged at 27.5 percent, the third hold decision this year.
This means borrowing costs remain high, credit might be tighter, and the cost of capital for businesses remains elevated.
Why the hold?
The decision to maintain the policy rate was driven by a combination of persistent domestic inflationary pressures and heightened uncertainty in the global economic environment, both of which continue to pose upside risks to the inflation outlook.
Read also: CBN holds rates third straight time on cooling inflation
How did the market react?
The decision to keep the benchmark rate unchanged was widely anticipated, and market reactions reflected this consensus. The equity market rose by less than one percent following the announcement, indicating that investors were largely aligned with the outcome and found no surprises in the accompanying statement.
Rates in the fixed-income market continued to trend downward, as it has been since the beginning of the year, with the market pricing in a rate cut. On Wednesday, at the treasury bill primary auction, yields on all tenors fell, with that of the one-year dropping to 18.86 percent from 19.47 percent at the last auction.
Strategy to consider…
“To cushion the effect of falling rates, consider locking in funds you won’t need in the short term into: Long-term Treasury Bills (270–360 days), good-rated Commercial Papers (CPs), High-Yield Savings Accounts (HYSA) – Longer Tenor,” Ayodeji Ebo, managing director, Optimus by Afrinvest.
This strategy helps shield your returns from further rate compression and ensures more stable portfolio performance.
Ebo said that investors who took advantage of the 20-21 percent interest rate in FGN Bonds are sitting on the money now if they decide to sell, and for those holding for the long term, the decline in rates doesn’t affect them.
Return on fixed-income mutual funds has also declined gradually, given the lower interest rate environment. Many of the money market fund yields have since dropped to the 20-21 percent region from a 26-29 percent region earlier in the year.
The decline in rates in the fixed income/money market space has been positive for the Nigerian Stock Market, as companies will be able to access funds at lower rates.
Similarly, Commercial Paper (CP) rates will also reduce, encouraging more companies to issue CPs.
Analysts at Meristem, in their 2025 half-year outlook, recommended a safe fixed income strategy for domestic investors to balance interest rate, liquidity, and default risks in a fixed income portfolio context, given their outlook on local fixed income market dynamics in 2025.
Read also: How CBN reforms ease inflation, stabilise FX, lift reserves to $37.93bn
It suggests allocating up to 25 percent to Eurobonds for hedging against naira depreciation and inflation, while also proposing a similar allocation to FGN Bonds and up to 20 percent to Corporate Bonds, both for their higher real rate of return, despite their lower liquidity.
To manage short-term liabilities and liquidity, the strategy allocates up to 15 percent to Commercial Papers and Treasury Bills, both with a modest duration.
Investors can also follow projections at CSL Stockbrokers, where their analyst foresees a positive outlook on the equity market, as softening fixed income yields should drive increased investor interest in equities.
Guiding principles in this environment…
The following is a summary of experts’ opinions on principles to guide your investment this period.
Risk Assessment: Re-evaluate your personal risk tolerance. The “higher-for-longer” scenario demands a clear understanding of what you can comfortably lose.
Long-Term Vision: Avoid hasty reactions. Interest rate cycles are temporary. Maintain a long-term perspective for your strategic investments, but be tactical with your short-term holdings.
Liquidity is King; Ensure you have adequate liquid funds to meet emergencies. In an uncertain rate environment, access to cash is paramount.
