· It was a well-taken decision, argues
· TOPE FASORANTI
· The decision by the Central Bank of Nigeria (CBN) on September 22, 2026 to reduce the Monetary Policy Rate (MPR) by 350 basis points, from 26.5 per cent to 23 per cent, was the right call. It was decisive and well-timed. Its real significance, however, lies beneath the size of the cut, and it rewards closer examination than the headline has so far received. Assessed through the effective policy stance, the real interest rate, a standard policy rule and the mechanics of liquidity management, it stands out as a carefully calibrated decision, anchored in sound economics and built for the next phase of Nigeria’s monetary framework.
· I argued recently that the price stability gains of the past two years would soon face a tougher test in reviving credit and growth. The September decision meets it with care.
· Start with the effective operating rate. When a banking system holds surplus liquidity, as Nigeria’s has for much of this year, overnight rates gravitate towards the floor of the policy corridor, because banks holding surplus reserves have the option of placing them at the deposit facility. Under the previous corridor of plus 50 and minus 450 basis points, that floor, the Standing Deposit Facility (SDF), stood at 22 per cent, and interbank pricing settled close to it. The new corridor of plus 50 and minus 300 basis points places the SDF at 20 per cent. The floor has therefore fallen by 200 basis points, well short of the headline 350, and the market has followed it. According to Cordros Research, the overnight rate closed the week to September 25, 2026 at 20.77 per cent. The rest of the cut realigns the official signal with rates already prevailing. A large headline move paired with a modest change in market conditions is the mark of a central bank adjusting with caution.
· The real interest rate reinforces this reading. A central bank that holds its nominal rate unchanged while inflation falls is tightening passively, because the real interest rate rises with every month of disinflation. In August 2025, the MPR stood at 27.5 per cent against headline inflation of 23.14 per cent on National Bureau of Statistics (NBS) data, a backward-looking real rate of about 4.4 percentage points. Today the MPR of 23 per cent sits against headline inflation of 15.39 per cent, a real rate of about 7.6 points. The comparison holds on the effective rate. In August 2025, the corridor of plus 500 and minus 100 basis points placed the SDF at 26.5 per cent, about 3.4 points above inflation. Today’s SDF of 20 per cent sits about 4.6 points above it. On either measure, real rates remain higher than a year ago. The cut returns only part of the passive tightening that disinflation has delivered. The CBN has described the decision as an operational recalibration and not a change in its underlying stance, and the real-rate evidence is consistent with that description.
· A simple policy rule offers a useful benchmark. The Taylor rule, a standard reference for central banks, sets the policy rate according to the neutral real interest rate, current inflation and the distance between inflation and its target. Applying it across the 6 to 9 per cent target the Bank has signalled for its inflation-targeting regime, assuming output is broadly close to potential, a neutral real rate of 2 to 4 per cent and either headline or core inflation, gives an illustrative range of roughly 17 to 24 per cent. The new MPR of 23 per cent sits within it, towards the cautious end. The Bank has calibrated its move on the side of prudence while disinflation completes its course.
· International comparison places this calibration in perspective. Measured against August inflation, the real policy rate stands at about 2 percentage points in Kenya, where the Central Bank Rate is 8.75 per cent and inflation 6.6 per cent, and close to 3 points in South Africa, where the repo rate stands at 7.25 per cent after its September increase and inflation at 4.4 per cent. In Egypt, whose policy corridor of 19 to 20 per cent sits against urban inflation of 14.5 per cent, it is about 5 points. Only Ghana, at roughly 9 points with a policy rate of 14 per cent and inflation of 5 per cent, holds a higher real rate, the result of the same passive tightening as inflation there fell faster than policy adjusted. Within this group of Africa’s leading economies, Nigeria’s monetary stance remains among the most restrictive in real terms after the reset.
· The timing rests on the quality of disinflation as much as its pace. Persistence in core inflation is what typically keeps central banks on hold, because it signals second-round effects in wages and services. NBS data show that core inflation has moderated for three consecutive months, from 16.82 per cent in May to 13.29 per cent in August, and core prices declined slightly on a monthly basis in August. The CBN’s September Inflation Expectations Survey, published after the decision, adds a supporting signal: households and firms assessed future inflation considerably less adversely than current inflation, with the expectations index at 25.1 points against 43.1 for perceptions. Because monetary policy acts with long and variable lags, a forward-looking central bank must act on the trajectory of inflation.
· The credit cycle supports the decision too. CBN money and credit statistics show that private sector credit rose for a third consecutive month in August to 84.55 trillion naira, but its nominal annual growth of 11.4 per cent remains below headline inflation, implying that credit to the private sector is still contracting in real terms. With real Gross Domestic Product (GDP) growing by 4.43 per cent, a measured adjustment supports a nascent recovery in lending. The public finances benefit too, as lower rates on new Treasury bills reduce the cost of government borrowing each time maturing debt is refinanced.
· On transmission, a bank’s lending rate combines the policy rate, a term premium, a premium for credit risk and the cost of regulation. The reset acts directly on the first, and over time it can reinforce itself through the third. Lower borrowing costs ease debt-service burdens and strengthen the balance sheets of firms and households, which reduces the probability of default and the risk premium lenders charge. Economists call this the financial accelerator, and in an improving macroeconomic environment it adds to the direct benefit of lower rates.
· The decision to retain the Cash Reserve Requirement (CRR) at 45 per cent for deposit money banks has a further consequence. When a large share of each deposit is held as unremunerated reserves, the effective cost of funding a loan from deposits is the deposit rate divided by the share that can be lent. On that simple arithmetic, and holding other costs unchanged, every percentage point decline in deposit rates at a CRR of 45 per cent lowers the funding cost of a deposit-funded loan by about 1.8 points. How far lending rates actually fall will depend on banks’ funding structures and pricing decisions. The same arithmetic means a high reserve requirement raises the level of lending rates, which is why its gradual normalisation would be a natural next phase once disinflation is fully embedded. The sequencing is prudent. Adjusting the price-based instrument first avoids releasing liquidity into a system already in surplus, which would press market rates against the floor and weaken the signal the Bank has just restored.
· Finally, the reset is an investment in institutional credibility. An inflation-targeting regime requires a policy rate that serves as a clear operating target. Having secured substantial disinflation through a period of firm monetary restraint, the CBN now has room to recalibrate. Preserving credibility will depend on continued progress towards price stability, supported by steady food supply, a stable exchange rate and transmission to lending, the natural markers to watch in the months ahead.
· The weight of the evidence therefore favours the committee’s judgement. The effective adjustment is moderate, real rates remain higher than a year ago and high by regional standards, and the new rate sits within the range a standard policy rule suggests. In an economy seeking to convert stability into sustained growth, the September reset gives monetary policy a sharper instrument and offers the real economy measured relief at a well-chosen moment.
· Dr. Fasoranti is an Economist, Banker, and Enterprise Transformation Strategist.