By Sheriffdeen Tella
The Monetary Policy Committee of the Central Bank of Nigeria took a bold step last week. The Committee dropped the monetary policy rate with a bang. It was long overdue, but the drop was more than expected. The CBN reset the monetary policy rate from 26 per cent to 23 per cent. The action was at the 370th meeting of the Committee, and it was a cut of 350 basis points, justified by moderating inflation, exchange rate stability, improvement in foreign exchange market liquidity, and accretion to the growing external reserves.
In addition to the cut in the monetary policy rate, the Committee narrowed the Standing Facility Corridor to +50/-300 basis points around the MPR but retained the cash reserve ratio at 45 per cent for deposit money banks, 16 per cent for merchant banks and 75 per cent for non-TSA public sector deposits. The Central Bank Governor explained that the adjustments represent an “operational realignment designed to restore the MPR as the primary signal for monetary policy and improve its transmission to market interest rates”.
CBN warned that the policy adjustment should not be seen as monetary easing but as a commitment to sustaining the ongoing disinflation process and transitioning the country towards an inflation-targeting framework. It further explained that the wide gap between the official policy rate and the prevailing money market rate had weakened the effectiveness of monetary policy, but adopting the Nigerian Overnight Financing Rate as a transaction-based benchmark has improved transparency in money market operations and created the conditions for the reset action.
This singular action by the CBN is expected to generate many positive results for the Nigerian economy, particularly for domestic investment. The government’s debt-servicing costs will fall, freeing up funds for project execution rather than frivolous travel. Pressure on the exchange rate will ease, and the rate will remain stable. Inflationary pressure can be further moderated downward, reducing the cost of living or improving the standard of living. Increased output from improved investment will put more products on the market, promoting choices in the consumer market and affordable prices, ceteris paribus.
The MPR is not a common interest rate. It is the rate at which a central bank lends money to domestic banks when they have a liquidity problem, and that is rare. More appropriately, however, it signals the level of interest rates banks charge their customers. If the central bank is charging banks 23 per cent, for example, the banks are expected to charge their customers more than 23 per cent for profit margins, as they have to assume that they are borrowing the money they are lending from the central bank. To that extent, lowering the interest rate, as the CBN has done now, implies that banks should also reduce their interest rates. Low interest rates are expected to encourage borrowing, just as high interest rates discourage it.
Now that the CBN wants to pursue some level of expansionary monetary policy and is coinciding with the release of money by politicians, the bank must remain vigilant. The assumption that liquidity easing under the current CBN policy will improve credit supply to the productive sector for investment will become reality and be beneficial if we avoid crowding-out effects caused by excessive borrowing from the public sector.
There is always competition between public and private sectors for credit in the financial market in an economy. Financial institutions usually have a preference for the public sector in approving credits and that have deleterious effects on the private sector. With the laudable coordination agreement between the Central Bank and the Ministry of Finance, the Bank should encourage the public sector to borrow less from financial institutions, particularly the money market, where the private sector borrows to meet running costs. The competition can even keep the interest rate high, which defeats the motive of the current monetary policy.
The tight-money policy the CBN has pursued over time has no doubt contributed to economic hardship. There are reports that headline inflation consistently eased in the last three months. From 15.43 per cent in July, prices came down marginally to 15.39 per cent in August 2026. Food inflation moved from 20.31 per cent in July to 19.57 per cent in August 2026, and core inflation was reported down to 13.29 per cent in August from 14.97 per cent in July 2026 due to a fall in the costs of transportation and healthcare. The Central Bank attributed the downward trend to its contractionary monetary policy. But the recent fuel price hike has pushed inflation up, suggesting Nigerian inflation is not purely monetary but structural or cost-push.
Actually, a report from the Manufacturers Association of Nigeria explained that manufacturers invested about N4.54tn in the Nigerian economy in 2025, but over N2tn worth of goods remain unsold due to shrinking consumer spending. The persistent fall in consumer spending points towards economic recession, and the CBN’s tight money policy is partly responsible for the restricted consumer spending. I have argued that the huge money supply the CBN is reporting may not be in the public domain but is being hidden by politicians for election spending in 2026 and 2027. Ineffective demand caused by the central bank’s contractionary monetary policy usually reduces demand, lowers output as producers cut inventory costs, and can eventually lead to unemployment and economic recession.
Regular monitoring of the policy’s results against expected performance is imperative to determine whether the outcome is positive, negative, or neutral.
Sheriffdeen Tella
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