Nigeria: How interest rates reduction stimulates the economy
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria on Tuesday the benchmark interest rates by 50 basis point to 27 per cent from 27.5 per cent, in this report, Bilal Omeiza examine the positive impact of the decision on the economy
The decision of the Monetary Policy Committee members of the Central Bank of Nigeria to cut the interest rate, for the first time in two years by 50 basis points to 27 percent is significant. It means lower cost of borrowing while encouraging new investments, supporting business growth, and enhancing capacity utilization in the real sector which can stimulate output growth and job creation.
The cut can lower savings rates and borrowing cost, encouraging spending and investment, spurring business activity and creating a sustainable tailwind for stocks.
The 12-member monetary policy committee lowered the benchmark rate to 27 percent from 27.5 percent, to encourage production, as a result of significant successes in disinflation efforts of the apex bank.
A low interest rate environment improves financing capacity, for consumers and businesses alike as well for the public and private sector institutions. Consequently, lower interest rate incentive both consumption and investment and, at the same time offset a drop in import stemming from a depreciated foreign exchange rate. By contrast, the devaluation of money favour companies that are in the import businesses, these businesses will be more competitive and as a result, will see increased export
Meanwhile, the interest rate was increased as the bank’s intention was to contain rising inflation and stabilise prices. Experts say interest rate manipulation is a tool that can be deployed into the economy or avoid it’s overheating.
The apex bank’s decision was informed by ongoing reforms by fiscal authority such as the removal of fuel subsidy, unification of the foreign exchange market and ending deficit financing by the Central Bank were begging to bear fruits. Inflation expectations were declining, coupled with the International Monetary Fund (IMF) projection of inflation perching at 24 percent in 2025 and 23 percent in 2026.
Experts says, Nigeria economic outlook is also showing signs of strength, with GDP growth at 4.23 percent in the second quarter, it’s fastest pace since 2021. With the IMF the 4.3 percent growth project in 2025, supported by oil projection of 1.7 million barrels per day and output from domestic refinery which has slow down pressure on our foreign reserve, other sectors of the economy, such as services, digital, agriculture and mining sector should not be left unturned for the greater outlook.
According to CBN Governor Olayemi Cardoso, the goal is to bring down inflation to single digit. Inflation which stood at 31 percent in 2024, fell to 20.1 in August, 2025, its fifth monthly decline. He said Naira has gained 3 percent against the dollar this month, while food prices are stabilizing. He noted the committee ” will remain proactive through a data-driven policy response”
What experts are saying
In a divergent opinion, some experts believe that the cut was not much, they noted that its impact wouldn’t be felt.
According to a Professor of Capital Market, Uche Uwaleke, half a percentage cut of interest rates is not enough, he expected the market to interpret the 50 basis points cut in the future.
He said, “Only significant cut in the interest rate could drive the economic growth and enhance enduring business environment.”
The bank is also worried about the negative impact of monthly FAAC allocations to monetary stability. It is concerned about excess liquidity and in particular.
Experts say it is necessary for Committee members to pay much attention to the various stakeholders and other players in the sector, as it obvious, only a significant cut would make major impact in the economy
“The half a percentage cut in Monetary Policy Rates is only tantamount to a slap on the wrist. I expect the markets to interpret the 50 basis points cut in the MPR as a signal to the future path of interest rates.
“This signaling property will be leveraged by portfolio managers as they rebalance their portfolios and pivot to equities,” he added.
Speaking on the adjustment of the Cash Reserve Ratio, Uwaleke who is a member of Daily Trust Board of Economists noted that “the CRR for commercial banks was actually reduced from 50% to 45%, akin together with the narrowing of the MPR corridor from -100/+500 to a symmetric corridor of +250/-250 is a welcome development expected to support economic growth,”
For Lagos-based economist, Dr. Olumide Ayoola, the cut “is symbolic rather than aggressive.”
“The CBN is trying to send a signal of support for growth, but the economy is still battling high food prices, exchange rate volatility, and structural bottlenecks. A larger rate cut would have risked fueling inflation further.
“The MPC is walking a tightrope,” Dr. Ayoola added. “It must support growth without stoking inflation, and that means we should expect more incremental adjustments rather than bold policy swings,” he said.
Similarly, investment strategist Funke Ojo observed that the reduction could improve liquidity for commercial banks and encourage lending, but warned that “until inflationary pressures ease, the benefit to the real sector will be marginal.”
