CBN’s measured rate cut to support foreign inflows, fixed-income appeal

By Chukwuma Umeorah

Nigeria’s first rate cut in over a year is poised to sustain foreign investor participation and preserve the appeal of domestic fixed-income assets, according to FBNQuest Merchant Bank, which said the central bank’s measured approach strikes a balance between supporting growth and maintaining market stability.

The Central Bank of Nigeria lowered its benchmark Monetary Policy Rate by 50 basis points to 26.50 per cent following the conclusion of its two-day Monetary Policy Committee meeting, marking a shift from the cautious hold adopted in November. All other policy parameters were left unchanged.

FBNQuest said the modest reduction signals the potential start of a gradual easing cycle, underpinned by an improving macroeconomic backdrop, while avoiding an aggressive move that could undermine Nigeria’s yield advantage.

“A calibrated pace of easing will help sustain the attractiveness of domestic fixed-income instruments and preserve foreign investor participation by maintaining favourable yield differentials,” the Lagos-based merchant bank said in an emailed note following the decision.

The rate cut comes as inflation continues to moderate. Headline consumer price growth eased to 15.10 per cent year-on-year in January from 15.15 per cent in the previous month, extending a steady dis-inflationary trend supported by broad-based declines across food and core components, analysts attributed the improvement largely to the lagged effects of earlier monetary tightening.

Currency stability, according to the bank has also improved, bolstered by stronger foreign portfolio inflows, rising crude oil export receipts and resilient diaspora remittances. As a result, Nigeria’s gross official reserves climbed to $50.4 billion, strengthening external buffers and boosting investor confidence.

For foreign investors, the combination of easing inflation and relatively high nominal yields has reinforced Nigeria’s carry appeal. By opting for a modest rate cut, the MPC signaled it is mindful of preserving that dynamic, FBNQuest said.

An aggressive reduction in borrowing costs could have compressed yields too quickly and narrowed the differential between Nigerian assets and those in advanced economies, particularly at a time when global monetary conditions are gradually loosening. Instead, the 50-basis-point move keeps real returns attractive while acknowledging the improving inflation outlook.

The bank also noted that the MPC are likely wary of excess liquidity in the run-up to the election cycle, which could stimulate demand-side pressures and slow the pace of dis-inflation. A measured easing path, it said, mitigates that risk while allowing the economy to benefit from gradually softer financial conditions.

FBNQuest expects renewed buying interest in the fixed income markets, especially at the belly and long end of the yield curve, as investors seek to lock in elevated yields ahead of further potential policy easing. Ample system liquidity is likely to reinforce that demand, supporting bond prices and compressing yields over time.

“As yields trend lower, some portfolio reallocation toward equities may also emerge, supported by an improving macroeconomic environment and stronger business sentiment. Still, fixed income is expected to remain a core allocation for both domestic and offshore investors in the near term”, FBNQuest Merchant Bank said.