Nigeria’s Central Bank has broken a long spell of monetary rigidity. At its 302nd Monetary Policy Committee (MPC) meeting, the Bank trimmed the Monetary Policy Rate (MPR) by 50 basis points, from 27.5 percent down to 27.0 percent, marking the first interest-rate cut since 2020. This move, while modest, signals a cautious shift in direction.
The Bank simultaneously adjusted key complementary parameters: the Cash Reserve Ratio (CRR) for commercial banks was reduced to 45 percent (down from 50 percent), while the CRR for merchant banks remained at 16 percent. In an effort to mop up excess fiscal liquidity, a new 75 percent CRR was introduced on non-TSA public sector deposits. The Liquidity Ratio (LR) was left unchanged at 30 percent, and the standing facilities corridor was tightened to ±250 basis points around the MPR (from an asymmetric +500 / –100).
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The delicacy of these changes reflects the balancing act facing the Central Bank: relaxing monetary conditions to spur growth while managing inflationary and liquidity risks.
One of the key motivations behind the cut is the sustained downward trend in inflation. By August 2025, headline inflation (year-on-year) had softened to 20.12 percent, marking the fifth consecutive monthly decline. This figure contrasts with earlier peaks in the prior year and reflects both base effects and structural adjustments in the Consumer Price Index methodology.
Officials argue that the lagged impact of past tightening, a more stable foreign exchange rate, moderation in petroleum prices, and seasonal declines in food costs will continue to pull inflation lower into the remainder of 2025. In his press briefing, Governor Olayemi Cardoso emphasised that the MPC’s decision was anchored in “sustained disinflation recorded in the past five months, projections of declining inflation, and the need to support economic recovery efforts.”
The confidence in disinflation is not blind optimism. The Bank’s internal projections suggest inflation will continue to moderate, conditioned on no major external or domestic shocks.
Macro Trends Supporting a Cut
Beyond inflation, Nigeria’s macro fundamentals offer a more receptive environment for easing. In the second quarter of 2025, the economy expanded by 4.23 percent year-on-year, the fastest pace in nearly four years, up from 3.13 percent in Q1. The rebound was largely fuelled by robust growth in the oil sector and a stabilising non-oil sector (which grew 3.64 percent in Q2).
Oil output averaged 1.68 million barrels per day during the quarter up from 1.41 million bpd in the same period a year earlier, propelling the oil sector’s growth to over 20 percent. Meanwhile, services, real estate, ICT, and financial intermediation have grown more prominent in the post-GDP-rebasing landscape, reshaping the growth drivers of the economy.
On the external front, the Federal Government’s efforts to maintain foreign exchange stability and rebuild reserves help underpin confidence. Gross external reserves stood at about US$43.05 billion as of September (giving an import cover of roughly 8.3 months), up from about US$40.51 billion in July. The naira has also shown relative steadiness, supported by stronger capital inflows and a current account surplus of US$5.28 billion in Q2.
Thus, the decision to ease comes not from desperation, but from a cautiously improving macro backdrop.
Risks and Mitigating Measures
Though the rate cut is intended to nudge growth, the Central Bank appears acutely aware of the risks. Excess liquidity, especially from fiscal injections, remains a concern for inflation and financial stability. Governor Cardoso himself warned of a “persistent build-up of excess liquidity in the banking system” stemming from government releases. To mitigate that, the Bank introduced the 75 percent CRR requirement on public sector deposits outside the Treasury Single Account, effectively sterilising a chunk of idle fiscal balances.
The tightening of the standing facilities corridor to ±250 basis points is also designed to sharpen monetary policy transmission, ensuring that interbank rates respond more sensitively to the MPR anchor.
Still, the move is not without perils. Should inflation reversal occur, as from food price shocks, supply disruptions, or currency pressures the Bank would need to re-adjust. Global risks, such as adverse commodity price swings or external financial shocks, could also test its resolve.
Nigeria’s Monetary Shift in Context
Nigeria’s policy shift mirrors a pattern seen elsewhere in emerging and frontier markets. As inflation pressures globally ease from post-pandemic extremes, central banks in many countries are cautiously pivoting from pure rate hikes to selective easing, while maintaining safeguards against liquidity surges.
Yet Nigeria’s challenge is particularly intricate. The footprint of fiscal operations is large, the pass-through from rates to real sector activity is uneven, and the sensitivity to external conditions is high due to oil dependence. Thus, the Bank’s use of multiple levers (CRR, standing facility adjustments, liquidity ratio) is not just prudent, it is necessary.
From the lens of global monetary governance, Nigeria’s decision underscores the growing importance of combining macroprudential tools with conventional monetary policy, especially in economies with significant fiscal and liquidity constraints.
Expectations and Watchpoints
With this cut, markets and economic agents will look for confirmation in several areas. First, will credit to the private sector increase meaningfully, and will borrowing costs for households and businesses ease? Second, can inflation continue its descent toward lower levels without reigniting? Third, how will the Central Bank respond if macro surprises emerge?
Olayemi Cardoso and his MPC have clearly set a tone: cautious optimism. The collective unanimous vote for the cut suggests strong internal alignment. For now, the 27 percent MPR may be the first of several steps, but the pace, direction, and prudence with which they’re taken will determine whether this becomes the start of a sustained easing cycle or a transient adjustment.
In sum, the decision to ease the MPR for the first time since 2020 is not a leap of faith but a calibrated turn. It reflects confidence in disinflationary trends, improving growth momentum, and a desire to rekindle lending and investment all while keeping a steady hand on the levers of liquidity and stability.
