The Central Bank of Nigeria’s decision to reduce its Monetary Policy Rate from 26.5 per cent to 23 per cent has raised hopes of cheaper credit, but questions remain over how much of the reduction will actually reach businesses and consumers.
The 350-basis-point adjustment, announced after the Monetary Policy Committee’s September 21 and 22 meeting, represents the biggest reduction in the current monetary policy cycle and brings the benchmark to its lowest level in 20 years.
However, the CBN has stressed that the decision should not be interpreted as a conventional shift towards loose monetary policy.
CBN Governor Olayemi Cardoso described the move as a “reset” and “recalibration” designed largely to restore the Monetary Policy Rate as an effective signal for financial-market conditions.
The apex bank said the previous 26.5 per cent rate had become increasingly disconnected from actual money-market rates, weakening the transmission of monetary policy to the broader economy.
Under the new framework, the Standing Facilities Corridor was recalibrated to plus 50 and minus 300 basis points around the MPR, while the Cash Reserve Requirement for deposit money banks remained at 45 per cent.
The CBN’s decision was supported by improvements in several key economic indicators, including inflation, economic growth, foreign-exchange conditions and external reserves.
Headline inflation stood at 15.39 per cent in August, while real Gross Domestic Product growth accelerated to 4.43 per cent in the second quarter from 3.89 per cent in the first quarter.
External reserves also reached about $55.25 billion, providing roughly 11.3 months of import cover, while the country recorded stronger balance-of-payments and current-account positions.
These developments gave policymakers greater room to recalibrate the monetary framework without abandoning the restrictive stance that has been used to contain inflation.
For businesses, however, the central question is not simply where the CBN’s benchmark stands but what commercial banks charge when companies actually seek loans.
Manufacturers and other private-sector operators have welcomed the rate cut but are demanding that banks translate the lower policy rate into more affordable lending.
The Manufacturers Association of Nigeria said that even with an MPR of 23 per cent, prime lending rates could remain around 27 to 30 per cent, levels the group argues are still too expensive for manufacturers competing in a difficult operating environment.
The concern is particularly important for small and medium-sized businesses that often depend on bank credit to finance inventory, equipment, expansion and working capital.
When borrowing costs remain extremely high, businesses may postpone investment, reduce production, rely on personal savings or seek informal financing instead of taking bank loans.
The transmission problem is complicated by the structure of the banking system and the wider economy, where lenders must consider deposit costs, credit risk, liquidity requirements, capital adequacy, operating expenses and the possibility of loan defaults.
Another major issue is government borrowing, which can provide banks with relatively attractive and lower-risk investment opportunities compared with lending to businesses facing significant operational challenges.
Power shortages, exchange-rate volatility, insecurity, logistics costs and weak infrastructure can all increase the risk attached to private-sector lending and ultimately push borrowing costs higher.
The CBN’s decision to retain a 45 per cent Cash Reserve Requirement also means banks will continue to keep a significant proportion of deposits with the central bank rather than deploy the funds directly into loans.
While the reserve requirement supports liquidity and monetary stability, businesses argue that lower borrowing costs will be difficult to achieve if credit remains constrained.
There is also concern about how quickly banks adjust lending rates after monetary-policy changes compared with how quickly they adjust deposit rates paid to customers.
The Punch Editorial Board noted that some banks had already moved to reduce interest paid on certain savings products following the CBN’s rate cut, while commercial lending rates remained significantly higher.
This creates an important test for the CBN because the effectiveness of monetary policy ultimately depends on transmission from policy decisions to money-market rates, bank lending and economic activity.
If businesses cannot access affordable credit, the reduction in the benchmark rate may have a much smaller effect on investment, production and employment than policymakers expect.
The CBN nevertheless maintains that the reset is intended to improve monetary-policy transmission by bringing the official benchmark closer to the rates at which liquidity is actually trading.
The bank has also indicated that monetary policy will remain data-dependent, meaning future decisions will be influenced by inflation, economic growth, exchange-rate conditions and other developments.
For now, the 23 per cent MPR provides some relief and a clearer policy signal, but it does not automatically translate into 23 per cent business loans or immediately cheaper credit.
The real test of the CBN’s latest decision will therefore be whether commercial lending rates begin to fall sufficiently for manufacturers, SMEs and other productive businesses to expand investment and create more jobs.
Nigeria has lowered the policy signal, but the bigger question remains whether cheaper money will finally make its way from the financial system to the businesses that need it most.