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Monetary Policy Committee members of the Central Bank of Nigeria (CBN) rose from their 307th meeting on September 22 with a firm decision to lower the Monetary Policy Rate (MPR), also known as lending rate from 26.5 per cent to 23 per cent.
The policy reset is expected to influence the cost of credit, investment decisions and household finances, as businesses and consumers watch for its impact on the wider economy.
The apex bank also resolved that commercial banks must continue to keep 45% of their customers’ deposits with the CBN, while merchant banks must keep 16%.
Already, the Nigeria Employers’ Consultative Association (NECA) and the Centre for the Promotion of Private Enterprise (CPPE) have welcomed the apex bank’s move, but stressed that it must translate into cheaper credit for businesses.
However, they warned that the success of the rate cut would depend largely on how quickly commercial banks transmit the lower policy rate to lending rates.
Director-General of NECA, Adewale-Smatt Oyerinde, described the decision as a step in the right direction after a prolonged period of tight monetary conditions.
Similarly, the Chief Executive Officer of CPPE, Dr Muda Yusuf, said the 350-basis-point cut represented a major shift towards supporting growth, investment and economic recovery.
Yusuf said the decision was timely, particularly against the backdrop of the improving inflation trend and the high cost of maintaining a restrictive monetary policy.
He noted that the previous MPR of 26.5 per cent had become increasingly misaligned with inflation, which stood at about 15.4 per cent, and prevailing money-market rates of around 20 per cent.
CBN’s decisions signal a fresh effort to improve the way monetary policy decisions influence the economy.
While the move changes the structure of the policy corridor, the CBN insists that it does not amount to a shift in the underlying direction of monetary policy.
Instead, the apex bank is seeking to strengthen the transmission of its decisions to the money market, improve the effectiveness of its policy framework and support Nigeria’s transition to an inflation-targeting system.
The decision comes against the backdrop of easing inflation, stronger external reserves, improved economic growth and rising confidence in the country’s external sector.
But it also comes at a time when global economic uncertainties, geopolitical tensions and possible election-related spending continue to pose risks to the outlook.
The MPC’s latest decision, therefore, offers insight into how the CBN is balancing the need to sustain the decline in inflation with the broader objective of supporting economic activity.
What the policy reset means for the economy
The latest MPC decision places emphasis on improving the machinery through which monetary policy operates.
Rather than announcing a new change in the policy rate, the CBN has focused on recalibrating the corridor and strengthening the MPR’s role as the main policy signal.
The outcome will depend on how effectively the adjustment improves the relationship between the CBN’s policy decisions and market interest rates.
For banks and other financial market participants, the corridor provides a framework for short-term liquidity management.
For businesses and households, the wider implications will depend on how developments in money market rates translate into lending conditions, investment decisions and access to credit.
The CBN’s commitment to evaluating the effectiveness of the recalibrated corridor indicates that the new arrangement will be monitored over time.
The Committee said future decisions would remain data-dependent, with the objective of sustaining the disinflation process.
This approach means that subsequent policy decisions will be influenced by developments in inflation, growth, exchange rates, liquidity and other relevant economic indicators.
New configuration for interest rates
At the centre of the MPC’s decision is the adjustment of the Standing Facilities Corridor to +50 and -300 basis points around the MPR.
With the policy rate fixed at 23 per cent, the corridor establishes the rates at which banks can access or deposit funds through the CBN’s standing facilities.
The new arrangement places the upper boundary at 23.5 per cent and the lower boundary at 20 per cent.
The CBN explained that the adjustment was necessary because of the divergence between the MPR and prevailing market rates, which had weakened the effectiveness of monetary policy transmission.
In simple terms, monetary policy transmission refers to the process through which the CBN’s decisions influence borrowing costs, lending conditions, investment, spending and, ultimately, inflation and economic activity.
When market rates move significantly away from the policy rate, the signal intended by the central bank may become less effective.
The MPC said the recalibration would help align the monetary policy implementation framework with market realities while strengthening the role of the MPR.
It also pointed to the ongoing repair of the monetary policy implementation framework, including the adoption of the Nigerian Overnight Financing Rate (NOFR) as a transaction-based operational benchmark.
According to the Committee, this has improved transparency in money market operations.
The CBN’s objective is to ensure that its policy rate provides a clearer reference point for financial market participants.
However, the bank stressed that the corridor adjustment should not be interpreted as a change in the existing monetary policy stance.
The distinction is important because a change in the operating framework does not necessarily mean that the central bank has decided to ease or tighten monetary policy.
The MPC described the decision as an operational realignment intended to improve the effectiveness of monetary policy and support the country’s inflation-targeting transition.
MPR corridor inflation shows signs of easing
The CBN’s decision was also influenced by developments in domestic prices.
Headline inflation declined to 15.39 per cent in August 2026 from 15.43 per cent in July, according to the figures presented by the MPC.
Although the monthly decline was modest, the Committee noted that headline inflation had fallen for three consecutive months.
Food inflation, which remains a major concern for households, declined from 20.31 per cent in July to 19.57 per cent in August.
The CBN attributed the moderation largely to lower prices of palm oil, vegetables and meat, among other food items.
Core inflation also declined, falling from 14.97 per cent to 13.29 per cent during the period.
The reduction was linked to lower transportation and healthcare costs.
The 12-month moving average of headline inflation dropped to 16.30 per cent in August from 16.89 per cent in July, marking the 20th consecutive month of moderation.
Month-on-month inflation also slowed sharply, declining from 1.57 per cent in July to 0.71 per cent in August.
These figures suggest that price pressures have eased compared with earlier periods, although the cost of living remains a concern for households and businesses.
For the CBN, the moderation in inflation provides evidence that earlier monetary tightening measures, exchange rate stability and improved inflation expectations are contributing to the disinflation process. Disinflation refers to a slowdown in the rate at which prices increase. It does not necessarily mean that prices are falling; rather, prices are rising more slowly.
This distinction remains significant for consumers, as lower inflation does not automatically translate into lower prices for goods and services.
The MPC also highlighted the Presidential Initiative on the National Affordable CNG Transit Programme, which it expects to reduce transportation costs and support further easing of inflationary pressures.
Whether these benefits will be sustained will depend on developments in transportation, food supply, energy prices and the wider economy.
Growth gains strengthen CBN’s confidence
Beyond inflation, the Nigerian economy recorded stronger growth in the second quarter of 2026.
Real Gross Domestic Product (GDP) expanded by 4.43 per cent, compared with 3.89 per cent in the preceding quarter.
The improvement was driven by stronger performance in both the oil and non-oil sectors.
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The non-oil sector grew by 4.31 per cent, up from 3.94 per cent in the first quarter.
The CBN attributed the performance largely to increased activities in information and communications technology, crop production, real estate, livestock, financial services and trade.
The oil sector also recorded a significant improvement, with growth accelerating to 7.31 per cent from 2.57 per cent in the preceding quarter.
The Committee linked the development to increased crude oil production and investment in the sector.
Meanwhile, the composite Purchasing Managers’ Index (PMI) rose from 51.1 index points in July to 52.7 points in August.
A reading above 50 generally indicates expansion in economic activity, while a reading below 50 suggests contraction.
The latest figure points to continued expansion across the sectors covered by the index.
For policymakers, stronger output growth offers some support for the view that the economy can continue to expand while inflationary pressures moderate.
However, growth figures alone do not fully capture the experiences of households and businesses, particularly where high operating costs, weak purchasing power and access to finance remain challenges.
The MPC’s task is to ensure that its monetary policy decisions support price stability without undermining the recovery in economic activity.
External reserves hit 18-year high
Another factor shaping the CBN’s assessment is the improvement in Nigeria’s external sector.
Gross external reserves stood at $55.25 billion as of September 18, 2026, according to the Committee.
The figure represents the highest level in 18 years and is sufficient to finance approximately 11.3 months of imports of goods and services.
A stronger reserve position can provide a buffer against external shocks and support confidence in a country’s capacity to meet international payment obligations.
The MPC also highlighted improvements in the balance of payments and current account.
The balance of payments surplus increased to $3.51 billion in the second quarter from $2.38 billion in the first quarter.
Similarly, the current account surplus rose by 67.92 per cent, from $4.49 billion to $7.54 billion during the period.
The current account measures a country’s transactions with the rest of the world, including trade in goods and services, income and transfers.
A surplus indicates that inflows from these transactions exceeded outflows during the period under review.
The improvement in Nigeria’s external position is significant because foreign exchange availability and exchange rate stability remain closely linked to inflation and business costs.
A more stable foreign exchange market can help reduce uncertainty for importers, manufacturers and other businesses that depend on foreign inputs.
However, external reserves and balance of payments figures must be considered alongside developments in crude oil prices, production, capital flows and external financing conditions.
The MPC acknowledged these positive developments as part of the broader economic environment supporting its decision to reset the policy framework.
Fiscal and monetary policy coordination
The CBN also drew attention to renewed cooperation between fiscal authorities and the central bank.
The Committee noted the signing of a Memorandum of Understanding on fiscal-monetary coordination between the Federal Government, represented by the Federal Ministry of Finance, and the CBN.
The agreement is expected to provide a structured framework for policy coordination and greater harmonisation of efforts towards achieving low and stable inflation.
Fiscal policy involves government decisions on taxation, spending and borrowing, while monetary policy covers the central bank’s management of interest rates, liquidity and other monetary conditions.
When these policies work at cross purposes, the effectiveness of economic management can be weakened.
For instance, aggressive government borrowing or spending can complicate efforts to control inflation, depending on the prevailing economic conditions.
The MPC’s reference to policy coordination suggests that the CBN considers cooperation between fiscal and monetary authorities important to sustaining the progress made on inflation.
The Committee also pointed to the successful recapitalisation programme in the banking industry.
According to the MPC, the exercise has strengthened banks’ capital buffers, resilience and capacity to finance long-term projects in critical sectors.
The potential impact of stronger bank capital extends beyond the financial system.
Banks with improved capital positions may be better placed to support businesses and infrastructure projects, although actual lending outcomes will depend on credit risks, borrower capacity, interest rates and broader economic conditions.
The CBN’s assessment is that these developments have created sufficient room for the operational reset of the policy rate corridor.
Global risks could complicate the outlook
Despite the positive developments recorded in the domestic economy, the MPC remains conscious of external risks.
The Committee projected global growth at 3.0 per cent in 2026, down from 3.5 per cent in 2025.
It cited the effects of the conflict in the Middle East, persistent trade policy uncertainty and constrained fiscal space as factors weighing on global economic expansion.
Although stronger technology-related investment could partly offset these pressures, the MPC said growth prospects remained uneven.
Energy-importing and low-income economies, in particular, face greater pressure from elevated energy costs and weaker fiscal buffers.
For Nigeria, international energy prices have implications for transportation, production costs, inflation and government revenue.
The Committee warned that global inflation risks remained tilted to the upside.
Supply chain disruptions, higher crude oil and commodity prices, trade fragmentation and renewed geopolitical tensions could intensify price pressures.
These risks could also delay the normalisation of monetary policy in major economies.
Changes in global interest rates and investor sentiment can influence capital flows into emerging markets, including Nigeria.
The MPC’s outlook is that domestic economic growth will remain resilient for the rest of 2026, supported by improving crude oil production, agriculture and other business activities.
It also expects inflation to moderate further in the short to medium term, supported by foreign exchange stability, the delayed effects of earlier monetary tightening and improved food supply as the harvest season progresses.
However, the Committee identified prolonged geopolitical tensions and election-related spending as potential sources of upward pressure on prices.
The reference to election-related spending reflects the possibility that increased expenditure during the political cycle could affect demand and inflation, depending on its scale and broader economic conditions.
Next meeting
The next MPC meeting is scheduled for November 23 and 24, 2026.
By then, economic data from the coming months should provide further information on whether inflation continues to moderate, how economic activity performs and whether the recalibrated framework is delivering the intended improvements in monetary policy transmission.
For now, the CBN’s latest decision reflects an effort to align its monetary policy operations with changing economic conditions while maintaining its focus on price stability.
The challenge remains ensuring that the gains recorded in inflation, reserves and economic growth translate into more predictable conditions for businesses and improved economic welfare for Nigerians.
