Nigeria’s Central Bank Governor Olayemi Cardoso speaks to journalists in Abuja. Photo: CBN

NNA News - Nigeria’s Central Bank has cut its benchmark interest rate from 26.5 percent to 23 percent, its largest reduction in the current monetary policy cycle, as inflation continues to moderate and conditions in the foreign exchange market improve.

The Monetary Policy Committee announced the 350-basis-point reduction following its meeting last week. The decision followed two consecutive meetings in May and July at which the rate was kept at 26.5 percent.

The CBN also reset its Standing Facilities Corridor to plus 50 and minus 300 basis points around the Monetary Policy Rate. Cash reserve requirements were left unchanged at 45 percent for deposit money banks, 16 percent for merchant banks and 75 percent for non-Treasury Single Account public sector deposits.

Governor Olayemi Cardoso said the adjustment was intended to improve the transmission of monetary policy after market interest rates had diverged from the benchmark.

“The rate reduction should be seen as an operational reset to enhance the effectiveness of monetary policy and support the transition to an inflation-targeting framework,” Cardoso said.

The CBN said inflation had continued to moderate, while foreign exchange conditions had improved. Its latest published figures put headline inflation at 15.39 percent, while the bank's September monetary policy statement pointed to stronger external-sector conditions and improved investor confidence.

Nigeria’s economy also expanded by 4.43 percent year on year in the second quarter, according to the National Bureau of Statistics. Growth improved from 3.89 percent in the first quarter, with both the oil and non-oil sectors recording growth.

Foreign exchange reserves have strengthened as well. CBN data showed gross reserves at about US$54.86 billion on Sept. 24, extending a rise that has improved the country’s external liquidity position.

Financial sector representatives have welcomed the rate reduction but have cautioned that its effect on businesses will depend on whether commercial banks reduce lending rates.

Okechukwu Unegbu, former president of the Chartered Institute of Bankers of Nigeria, said the reduction was a step in the right direction but argued that borrowing costs remained high for businesses in the real economy. He called for further reductions to make credit more accessible to small and medium-sized enterprises and industrial operators.

Boniface Okesie, president of the Progressive Shareholders Association of Nigeria, said the improvement in several economic indicators created room for further easing. He also pointed to the importance of how quickly commercial banks pass lower rates on to businesses.

“High borrowing costs place local manufacturers at a disadvantage when producing goods for domestic consumption,” Okesie said.

The Manufacturers Association of Nigeria has also welcomed the decision. Its Director-General, Segun Ajayi-Kadir, said the reduction could ease financing pressures on manufacturers, although the association has warned that commercial lending rates remain considerably higher than the policy rate.

“The association expects the lower policy rate to reduce borrowing costs and improve access to working capital, inventory financing and investment funds,” Ajayi-Kadir said.

The rate cut leaves the CBN with the task of balancing cheaper credit against the need to keep inflation under control. For businesses, the immediate question is whether the reduction in the benchmark rate will translate into lower commercial borrowing costs and greater access to finance.