The Central Bank of Nigeria cut its benchmark interest rate by 350 basis points on Tuesday, from 26.5% to 23%. It is the largest single cut in the Monetary Policy Rate's modern history, and it came as a surprise: most economists surveyed before the meeting expected a hold.
What happened
At the end of the Monetary Policy Committee's 307th meeting in Abuja, Governor Olayemi Cardoso said the committee had decided to "reset the monetary policy rate to 23 per cent."
The committee also narrowed the corridor around the rate to +50/-300 basis points, from +50/-450. That puts the Standing Lending Facility at 23.5% (previously 27%) and the Standing Deposit Facility at 20% (previously 22%).
Cash reserve requirements were unchanged: 45% for commercial banks, 16% for merchant banks and 75% for non-TSA public sector deposits.
Why it matters
The headline cut is 350 basis points. The rate that actually priced the market moved by 200.
Before Tuesday, the MPR sat at 26.5% while interbank rates traded close to the 22% deposit floor. Banks priced transactions off that floor rather than the official rate. Cardoso said the gap had weakened the transmission of policy to the wider economy, and described the decision as an operational reset, not a change in the CBN's stance.
The backdrop
Headline inflation eased to 15.39% in August, the third straight monthly decline, down from 23.14% a year earlier.
Food inflation slowed to 19.57%.
The gap between the policy rate and inflation narrows from about 11 percentage points to about 7.6, still among the highest real rates in the world.
Market reaction
The NGX All-Share Index rose 0.18% to 250,614.66 on Tuesday, adding ₦298bn (about $224m) in market value. The naira briefly strengthened after the announcement before settling around ₦1,330 to the dollar.
What they're saying
Uche Uwaleke, president of the Capital Market Academics of Nigeria, said the cut was justified by moderating inflation, a stable exchange rate, improved FX liquidity and rising reserves. He added that the CBN would need to manage exchange-rate and portfolio-flow risks as interest-rate differentials narrow.
Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, said the changes to the corridor blunt the overall impact of the cut.
Watch: Bank lending rates over the coming weeks, and whether the cut reaches borrowers while 45% of commercial bank deposits remain locked in reserve requirements.
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