By Kingsley Ani
The Central Bank of Nigeria’s decision to cut its benchmark interest rate could ease financing pressures on businesses and support investment, according to the Centre for the Promotion of Private Enterprise (CPPE).
The CBN reduced the Monetary Policy Rate (MPR) by 350 basis points from 26.5 percent to 23 percent after the conclusion of the 307th Monetary Policy Committee meeting in Abuja.
In a policy brief signed by its Chief Executive Officer, Muda Yusuf, CPPE described the adjustment as a significant departure from the restrictive monetary policy stance of recent years.
“The magnitude of the adjustment was largely unexpected and represents a significant shift from the prolonged restrictive monetary policy regime,” the organisation said.
CPPE said the decision reflects an attempt to balance inflation management with the need to support investment and economic recovery.
“It signals an important rebalancing of monetary policy towards supporting growth, investment and economic recovery, while preserving price and financial-system stability,” it said.
The group also welcomed the review of the asymmetric corridor around the MPR from +50/-450 basis points to +50/-300 basis points, saying it reinforces the recalibration of the monetary policy framework.
For businesses, the main opportunity lies in potentially lower borrowing costs. CPPE said manufacturers, farmers, construction companies and logistics operators have been particularly affected by high financing costs, which have constrained investment, production and working capital.
It noted that the previous 26.5 percent MPR had become increasingly misaligned with inflation of about 15.4 per cent and money-market rates of around 20 percent.
“The reduction of the MPR to 23% should therefore be viewed not merely as monetary easing, but as an important realignment of the policy rate with prevailing macroeconomic and financial-market conditions,” CPPE said.
The group expects commercial banks to respond by adjusting lending rates on new and existing facilities.
“Without meaningful transmission to borrowers, the impact of the policy adjustment on investment and economic growth would be limited,” it said.
The rate cut could also influence the federal government’s domestic borrowing costs. CPPE said sustained moderation in interest rates could lower the marginal cost of government borrowing and eventually reduce domestic debt-service pressures.
Such savings, it said, could create additional fiscal space for infrastructure, security, education and healthcare.
“The fiscal dividend would, however, depend on the extent to which the MPR adjustment translates into lower yields across the government securities market,” the organisation added.
However, CPPE identified foreign exchange and capital-flow risks associated with monetary easing. It said the gap between Nigeria’s interest-rate direction and rate increases in some major economies could affect the attractiveness of naira-denominated assets.
“This creates a potential risk of portfolio-flow reversals and renewed pressure on the foreign-exchange market,” CPPE said.
The organisation noted that stronger foreign reserves, improved foreign exchange stability and better external-sector buffers could give the CBN greater room to manage such risks. It urged the apex bank to remain prepared to use instruments, including open market operations, to contain excessive volatility.
CPPE also stressed that lower interest rates alone cannot deliver sustainable economic recovery. High energy and logistics costs, insecurity, infrastructure deficits, food-production constraints and regulatory costs continue to weigh on businesses.
“The current monetary recalibration should therefore be complemented by stronger fiscal and structural interventions aimed at reducing production costs, improving productivity, strengthening food and energy security, and expanding domestic productive capacity,” it said.
The group said the immediate priority should be ensuring that cheaper monetary conditions translate into lower credit costs, higher investment and increased productive output without triggering renewed inflation or exchange-rate pressures.
