CBN eases interest rate on lagged tightening effects, stable FX

Omeiza Bilal

The Monetary Policy Committee meeting has come and gone but the decisions taken by the apex body of the Central Bank of Nigeria (CBN) continues to echo across the length and breadth of the country.

True to the predictions by experts and financial players, the Committee reduced the Monetary Policy Rate by 50 basis points to 26.5 per cent.The rate cut comes after following six consecutive hikes in 2024, followed by three straight pauses in 2025.

Also, the Committee retained the Standing Facilities Corridor around the MPR at +50/-450 basis points, and retained the Cash Reserve Requirement (CRR) for Deposit Money Banks at 45.00 per cent, Merchant Banks at 16.00 per cent, and 75.00 per cent for non-TSA public sector deposits.

According to the CBN Governor, Yemi Cardoso, the Committee’s decision was premised on a balanced evaluation of risks to the outlook, which suggests that the ongoing disinflation trajectory would continue, largely supported by the lagged transmission of previous monetary tightening, sustained exchange rate stability, and enhanced food supply.

The rate cut was justified by “sustained disinflation recorded in the past five months, projections of declining inflation for the rest of 2025, and the need to support economic recovery efforts,” Cardoso said.

.Headline inflation (year-on-year) eased to 15.10 per cent in January 2026, from 15.15 per cent in December 2025. While food inflation declined markedly to 8.89 per cent from 10.84 per cent over the same period, supported by improved domestic food supply, sustained exchange rate stability, and favourable base effect.

Similarly, core inflation declined to 17.72 per cent from 18.63 per cent, driven largely by moderation in the average prices of Information & Communication services.

Tightening cycle shift

Experts say the move signals a shift from the aggressive tightening cycle that began in 2024 to a more stabilization-oriented approach, reflecting sustained economic improvements.

According to them, the decision aims to support growth without reigniting inflation, amid projections for continued disinflation and enhanced foreign exchange stability.And with gross external reserves hitting $50.45 billion as of February 16, 2026, the highest in thirteen years, this has been bolstered by portfolio inflows and remittances.

This has supported naira stability, with the official exchange rate holding around N1,350/USD and the parallel market at N1,400/USD post-decision.

GDP growth accelerated to 3.88% in Q4 2025, with non-oil sectors contributing significantly. The banking system remains robust, with 20 banks already recapitalized ahead of the March 31, 2026, deadline, non-performing loans below 5%, and capital adequacy ratios above regulatory minima.

The outlook emphasizes balanced risks, with upside inflation pressures from fiscal spending and external shocks offset by downside factors like improved food supply and FX inflows.

The MPC reiterated its commitment to evidence-based policymaking, prioritising price stability while supporting recapitalisation efforts to enhance credit transmission.

Sentiments

Public and market reactions to the rate cut have been predominantly positive but tempered with caution reflecting optimism about economic relief alongside concerns over policy transmission and sufficiency.

For the Lagos Chamber of Commerce and Industry (LCCI) and Nigeria Employers’ Consultative Association (NECA), the cut is a pivotal shift to stabilisation, expecting lower borrowing costs to boost investment, SMEs, and household consumption.

Some analysts have described the move as “necessary and defensible,” signaling confidence in disinflation and potential GDP growth above 4%.

However, others fear that while the move was a good one for the economy, say fiscal borrowing could crowd out private credit, limiting the cut’s impact.

Meanwhile, the equity markets reacted adversely, with the NGX All-Share Index dropping 0.91% and investors losing N1.14 trillion, signaling skepticism about immediate benefits amid high yields on government securities attracting “hot money.”

The MPC’s decision represents a prudent pivot, backed by solid evidence of recovery, but sentiment and stakeholder dynamics reveal hurdles in translating policy into real-economy gains.

Stakeholders urged the CBN to enhance credit guarantees and fiscal coordination to avoid crowding-out. They opined that the cut could herald a broader normalization if conditions hold, potentially setting Nigeria on a path to 4-5% growth in 2026.

Improved macroeconomic stability Economist Adefolarin said the MPC decision is an indication that the country was experiencing macroeconomic stability.

Adefolarin noted that the Committee’s decision did not come as a surprise to many because they felt it was long overdue.

According to the economist, “while all this may sound too technical for average Nigerian comprehension, what the foregoing simply means is that we are enjoying an improving macroeconomic stability, that is now under disinflation that reveals moderate price stability justifying for rate cut.

“Instructively, this has demonstrated that CBN’s Monetary Policy Committee (MPC), has now moved away from it earlier stance, adopting a wait-and-see approach having confidence that the worst of the inflation cycle is behind us.

“However, it has to remain cautious and vigilant over what could be potential risks and drivers of imbalance to the accrued improvements of the current macroeconomic variable’s successes.

“Evidentially, what is ahead is a disinflation trajectory, that we believe could further help the economy in sustaining exchange rate stability, external boost, moderate tightness on cash flow by the CBN.”

Prof. Uche Uwaleke sees the move by the MPC as a signal for continuous easing.

He said: “I consider the 50 basis point cut as a signal. If disinflation continues for another two to three months and external conditions remain stable, we could see further gradual cuts. But the era of aggressive easing is unlikely unless inflation falls much faster or growth weakens sharply.

“So overall, I would describe the 50 basis point cut as prudent, credibility-building, and consistent with a central bank that wants to consolidate macroeconomic stability. It is a transition from tightening mode to calibrated easing mode, and that distinction is very important for market confidence.”

Impact

Experts has expressed confidence that lower MPR should gradually reduce lending rates, easing loan costs for households on mortgages, vehicle financing, and personal credit, potentially boosting disposable income and consumption.

They averred that savings rates may dip slightly, but high CRR retention limits aggressive bank lending, curbing potential inflation resurgence that could erode purchasing power further.

“Vulnerable groups may see indirect relief via cheaper credit for SMEs supplying essentials, though transmission lags mean benefits won’t be immediate.”

National development effects

The modest cut aims to stimulate investment in the real sector, including manufacturing and agriculture, by lowering business borrowing costs after prolonged tightening stifled growth. PMI expansion to 55.7 points in January signals industrial momentum, which cheaper credit could amplify, fostering job creation and GDP growth projected amid structural reforms. Retained tight liquidity tools guard against fiscal spending risks, supporting sustained reserves ($48.9-50.45 billion) and FX stability essential for infrastructure funding.

Mandate alignment

CBN’s dual mandate—price stability and financial system soundness—is advanced by anchoring disinflation (11th month of decline) while pivoting cautiously to growth support via data-driven easing. Cardoso emphasised vigilance against upside risks like election spending, aligning with evidence-based policy to balance inflation control (core at 17.72%) and economic resilience.

This measured stance sustains reform gains like FX unification, positioning policy for further easing if inflation hits 12.94% 2026 forecast.

“Instructively, we foresee benefits such as stability in the foreign exchange, robust capital inflows, and improvement in the balance of payments”, Adefolarin said, “In addition we see the economy regaining and attracting more capital inflow in the form FDIs and FPIs.

“Similarly, it is expected that CBN rate cut should translate to lower lending rates in supporting business credit facilitation, access and growth of banks credit without undermining liquidity and price stability,” Adefolarin added.

Going forward

The CBN MPC must be practical and cautious against fiscal funds releases, Adefolarin said noting that election-related spending could pose risk in the form of excess liquidity in the system that is to come from 2026 budget of ₦58.18 trillion and its capital components of ₦26.08 trillion is government spending for capital raised concerns and even as the 2027 election, political activities and campaign spendings.

“Sadly, the above scenario is out of control of the CBN and it must stand on its core mandate of ensuring price stability, at the same time proving a well dissected empirical monetary safeguarding policy alongside sound and resilience fiat policy action for Nigeria’s financial system.

“In addition, it is expected that there is a need to prevent excess liquidity from undermining current macroeconomic progress.

“Now that a lot is expected from the Apex bank, it must step up its measured and data-driven fine-tuning of monetary action, deepen its alignment for sustaining improving macroeconomic fundamentals, sustain the declining inflation, rally the rising reserves, enhance the trade balance, and FX stability,” he explained.