CBN Rate Hold Keeps Credit Tight, Meristem Warns of Prolonged Squeeze

The Central Bank of Nigeria’s Monetary Policy Committee has paused its aggressive rate hikes, but the economy faces a long stretch of tight credit. Investment analysts at Meristem Securities Limited say the decision to hold the Monetary Policy Rate at 26.50 percent will keep borrowing costs high and slow business expansion.

The MPC voted to hold rates steady due to renewed inflationary pressures, rising food prices, and global commodity risks. That means companies and households will continue to struggle to access capital. For Nigerian businesses looking to fund capital projects or growth, current interest rates make such moves unviable. Many have put expansion plans on hold. Households are also cutting back on discretionary borrowing.

Meristem analysts noted: “The high cost of borrowing is expected to keep credit creation relatively weak, as both lenders and borrowers remain cautious amid still-tight financial conditions.” This slowdown in credit directly hits domestic productivity.

But there is a positive side for macro stability. The analysts pointed out that the tight posture will help defend the naira. They said: “For businesses and households, financing conditions remain restrictive, limiting borrowing appetite and slowing expansion decisions, although exchange rate stability should continue to reduce some pressure from imported inflation.”

Banks Shift to Treasury Income

For commercial lenders, the high-rate environment is creating a split. On one side, elevated rates boost interest income from investment securities and repriced variable-rate loans. On the other side, the high cost of borrowing chokes credit expansion. Both lenders and borrowers are cautious to avoid bad loans. So actual credit creation stays sluggish.

Meristem’s banking sector analysis highlights this shift: “For banks, elevated rates should continue to support interest income, particularly from investment securities and repriced risk assets. However, the high cost of borrowing is expected to keep credit creation relatively weak, as both lenders and borrowers remain cautious amid still-tight financial conditions. This means earnings growth across the sector is likely to remain skewed toward treasury-related income rather than broad-based loan expansion.”

CBN Governor Defends Tight Policy

CBN Governor Olayemi Cardoso defended the decision to keep rates high despite complaints from the private sector about the cost of capital. Speaking after the MPC meeting in Abuja, Cardoso said exchange rate stability is key to controlling core inflation. He stated: “It is key that the centrepiece of our toolkit is ensuring that our foreign exchange rate remains stable. Although inflation has risen marginally for two consecutive months, largely induced by external shocks, the MPC recognised its transitory nature and remained confident that the current macroeconomic environment is sufficiently robust to support a return to disinflation.”

Liquidity Flows Back to Government Instruments

With credit expansion stifled in the real economy, idle institutional cash is flowing back into safe government instruments. Softer loan demand means banks and asset managers will keep buying Treasury bills and bonds at primary auctions. But heavy sovereign borrowing and persistent inflation risks will keep yields high. A sharp drop in yields is unlikely in the near term.

Equity Strategy: Go Defensive

For equity investors, the strategy must be selective. Meristem analysts advise focusing on defensive stocks with strong fundamentals that can survive a high-cost environment. They concluded: “In the fixed-income market, softer loan demand is expected to keep liquidity flowing into Treasury Bills and Bonds, supporting demand at primary auctions and limiting sharp upward pressure on yields in the near term… In equities, investor interest is likely to remain concentrated in fundamentally strong counters with resilient earnings and attractive dividend prospects… Going forward, the MPC is expected to maintain a cautious stance until inflation moderates more convincingly and exchange rate stability becomes more firmly established.”