CBN Cuts MPR to 23% in Surprise Move, Analysts See Positive Market Impact

The Central Bank of Nigeria cut its benchmark policy rate to 23 per cent from 26.5 per cent on Tuesday, a reduction of up to 350 basis points at the end of its rate-setting meeting. Governor Olayemi Cardoso called the decision “an operational reset” aimed at improving the effectiveness of monetary policy and aiding the shift to an inflation-targeting framework.

Analysts say the move could have a broadly positive impact on markets, though risks remain.

Why the CBN cut rates

Cardoso drew attention to the divergence between the reference rate and prevailing market rates, which he said had eroded the effectiveness of monetary policy transmission. Inflationary pressure has eased in Africa’s most populous nation over the past few months. Consumer inflation dropped to 15.39 per cent in August from 15.43 per cent a month earlier, giving the monetary policy committee room to cut rates. Other positive macroeconomic indicators include exchange rate stability, with the naira gaining about 8 per cent against the dollar so far this year, and much stronger external reserves, now at $55.3 billion, the peak level in eighteen years. Those favourable conditions allowed the CBN to cut the interest rate from a position of strength. Even with the steep cut, the real interest rate, which measures the difference between the nominal interest rate and the inflation rate, is still reasonably strong at 7.61 per cent, one of the highest in sub-Saharan Africa, Mr Dublin-Green said.

Analysts react

Arnold Dublin-Green, CIO/COO, BGL Asset Management Limited, said: “I actually think it’s quite positive. But the risk for the rest of the year is oil price volatility and pre-election spending that might put some pressure, heading into 2027.” He added: “There’ll be a rotation out of fixed income into equities and, generally, equity markets that have a good representation of positive macro. You should see strengthening in equity markets relative to yields in the Treasury bill market. But asset prices as a whole will trade better.”

He noted that the downward rate adjustment is “very supportive for markets,” even though it benefits equities more than fixed income. It will help ease borrowing costs for the Debt Management Office. He pointed to the likelihood that the CBN’s OMO bills would decline due to the interest rate reduction.

Oluwayemisi Sunmola, Sub-Saharan Africa banking research analyst at Vetiva Capital Management, said: “The reset of the MPR to 23 per cent should not be seen as conventional monetary easing, but rather as a recalibration to align the benchmark policy rate with prevailing market conditions.” Sunmola added: “By addressing the disconnect between the MPR and market rates, the recalibration strengthens monetary policy transmission and provides a clearer framework for pricing financial assets.”

What it means for markets and naira

Matilda Adefalujo, investment research analyst at Meristem Securities, expects OMO bills to trend toward treasury bills and bonds, both of which have seen declines in average yields in the thin secondary market since the rate-cut announcement. She is upbeat, nevertheless, that the rate on OMO bills will not fall as sharply as those on bonds and treasury bills have, given the need to maintain a premium to incentivise foreign portfolio investors to enter the market and help increase accretion to external reserves. “That is going to be helpful for the CBN or the monetary authority to intervene in the FX market and help to sustain the stability of the naira that we’ve already started to see,” Adefalujo said. She sees the rate reduction as an opportunity for the government to borrow at lower rates so that when inflation spikes and rates go back up, it will have already secured funding at lower costs.