Nigeria’s central bank kicked off a long-awaited monetary easing cycle with a cautious 50 basis-point cut to its benchmark interest rate, lowering it to 27%, the first reduction in five years, as policymakers seek to boost growth while guarding against inflation.
The move, announced on Monday, comes as headline inflation cooled to a three-year low of 20.12% in August, down from a peak above 34% earlier in the year, and amid a strengthening naira and swelling foreign reserves.
The Nigerian Exchange’s All-Share Index slid 0.40% on Tuesday to close at 140,929.60 points, shedding about 569 points and erasing N326 billion ($200 million) in market capitalization, bringing the total to N89.2 trillion. Selling pressure hit every major sector, with energy stocks leading the decline at 1.80%, followed by banking (1.04%) and commodities (0.90%). Losers outnumbered gainers 35 to 16, reflecting profit-taking and lingering caution despite the policy shift.
The Central Bank of Nigeria (CBN) under Governor Olayemi Cardoso has hiked rates aggressively since 2023 to combat runaway inflation and stabilize the naira, which has appreciated modestly to around N1,487 per dollar in official markets following the cut. Reserves have climbed to $42.1 billion, bolstered by steady oil revenues and foreign inflows drawn to high yields.
But with GDP expanding at a robust 4.23% in the second quarter, the fastest since 2021, analysts say the pivot prioritizes growth without fully unwinding the hawkish stance.
“This is more a signal than a sea change,” said Uche Uwaleke, a professor of capital markets at Nasarawa State University.
The modest cut could prompt portfolio managers to reallocate toward equities as fixed-income yields soften, potentially sparking a rally in stocks.
Economists broadly agree the reduction, accompanied by a drop in the cash reserve ratio for banks to 45% from 50%, will ease borrowing costs, encouraging credit to small businesses and households that have been squeezed by rates above 30% in the private sector.
However, lower credit costs must flow through to businesses for expansion and job creation, and to households via reduced living expenses. Without effective pass-through, high reserve requirements could blunt the impact.
For equities, the implications are mixed but lean positive over the medium term.
High rates have funneled capital into sovereign bonds, attracting inflows and stabilizing the currency.
A softer policy could reverse that, boosting stock valuations by making corporate borrowing cheaper and drawing investors away from fixed income.
United Capital analysts predict equity rallies as companies tap capital markets more readily.
Still, risks loom. An aggressive easing, some forecast 125-350 basis points by year-end, might trigger outflows as foreign portfolio investors chase higher yields elsewhere in Africa, like South Africa or Egypt, which cut rates in August.
“The CBN’s delayed cuts preserved inflows but stifled SMEs, which drive over 40% of GDP,” noted a report from AInvest.
This modest step could unlock productivity, but premature moves risk reigniting inflation.
Dr. Rislanudeen Muhammad, a former CBN official, called for deeper cuts and quantitative easing to aid manufacturing, warning that the 50-basis-point trim is “merely symbolic” without fiscal coordination to manage liquidity from rising federal allocations.
Inflation, while easing, remains double the CBN’s 6-9% target, driven by food prices and supply-chain woes.
Investors will watch the next MPC meeting in November for clues on the pace of cuts.
