Executive Summary
The Central Bank of Nigeria’s Monetary Policy Committee (MPC) meets again on September 22–23, 2025. With inflation easing for four consecutive months, reserves at a 44-month high, exchange rates stabilizing, and credit to the private sector softening under tight financial conditions, the case for a calibrated rate cut is compelling. A 100 basis point reduction in the Monetary Policy Rate (MPR) from 27.50% to 26.50%, would balance the objectives of supporting growth, preserving disinflation momentum, and maintaining investor confidence.
This paper argues that the MPC has entered a window of opportunity to begin a cautious policy pivot. Nigeria’s macroeconomic landscape has shifted in meaningful ways: inflation pressures are moderating, the exchange rate is more stable, and foreign reserves are stronger. At the same time, domestic credit conditions are tightening to the point of constraining businesses. A measured rate cut would therefore be both timely and justified.
1. Disinflation Is Gaining Traction
1.1 Headline Inflation Trend
Nigeria’s headline inflation has steadily declined:
- July 2025: 88% (fourth consecutive monthly decline)
This disinflation trend is significant because it suggests that earlier policy tightening is working. Inflation has dropped by more than 11 percentage points year-on-year from 33.40% in July 2024. This is not a small achievement, it represents a rare period of consistent price moderation in Nigeria’s recent economic history.
1.2 Why This Matters
Disinflation is important because it provides breathing room for businesses and households. For companies, lower inflation means reduced costs for inputs, easier planning for budgets, and better predictability for investment decisions. For households, it means improved purchasing power, particularly for essential goods like food and energy. Sustained disinflation also strengthens consumer confidence, which in turn supports aggregate demand.
1.3 Real Interest Rate Dynamics
With MPR at 27.50%, the ex-post real policy rate is +5.6%, one of the highest among frontier and emerging markets. Real rates this high can suppress productive investment because borrowing becomes excessively expensive. Even after a 100 bps cut, Nigeria would maintain one of the tightest monetary stances in Africa, ensuring that inflation expectations remain anchored.
2. External Buffers Are Stronger
2.1 Reserves at Multi-Year Highs
One of the major constraints on monetary easing in the past was the fragility of external buffers. That picture has changed dramatically in recent months:
- Foreign reserves have risen above $41 billion, the highest level in nearly four
- This rise has been supported by steady oil receipts, improved remittance inflows, and stronger capital inflows.
Higher reserves matter because they provide the CBN with ammunition to intervene in the FX market if pressures resurface. They also boost investor confidence, signaling that the country has the financial strength to manage external shocks.
2.2 Exchange Rate Stability
The naira has held steady in the official NFEM market around ₦1,526 – ₦1,533 per USD into early September, compared to periods of heightened volatility earlier in 2025. Exchange rate stability reduces the risk of imported inflation and creates a more predictable environment for businesses engaged in international trade.
2.3 Implications for Policy
These developments mean that the external position is sufficiently resilient to absorb a cautious easing of monetary policy. Cutting rates modestly will not necessarily weaken the naira or trigger destabilizing capital outflows, especially given the recent sovereign rating upgrade and positive investor sentiment.
3. Domestic Activity and Credit Dynamics
3.1 Stronger Business Activity
Economic activity is showing signs of revival. The August private-sector Purchasing Managers’ Index (PMI) crossed 54, with new orders at a 19-month high. This is a leading indicator of economic expansion.
What is the PMI?
The PMI is a survey-based economic indicator that captures the health of the business environment. It asks purchasing managers about new orders, output, employment, supplier delivery times, and inventories. A PMI reading:
- Above 50 → signals expansion in business
Nigeria’s PMI has been consistently above 50 since April 2025, showing that businesses are expanding. The upward trend — from 50.5 in April to 54.2 in August — suggests growing confidence in demand and a strengthening recovery.
Why the PMI Matters
PMI is widely regarded as a leading indicator. It provides an early glimpse into how the economy is performing before official GDP data becomes available. Policymakers and investors track it closely because it reflects real-time business sentiment.
In Nigeria’s case, the recent PMI readings suggest:
- Improving domestic demand, as firms report stronger new
- Rising employment potential, as businesses prepare to expand
- Confidence in price stability, as inflation pressures ease, allowing firms to plan
3.2 Tight Credit Conditions
Despite stronger PMI readings, the credit environment remains tight:
- Bank lending to the private sector has softened in recent
- High nominal interest rates and elevated cash reserve requirements (CRR at 50%) have constrained banks’ ability to extend credit.
- Many SMEs face prohibitively high borrowing costs, which stifles expansion and job
A 100 bps reduction in the MPR would not completely solve this problem, but it would help ease conditions. It would also send a clear signal to lenders that monetary policy is beginning to normalize in response to improved fundamentals.
4. Policy Continuity and Market Confidence
4.1 MPC Forward Guidance
The July MPC decision to hold the MPR at 27.50% was framed as conditional on evidence of sustained disinflation. That condition has now been met with the July CPI print, giving the MPC room to adjust policy.
4.2 External Validation
The credibility of Nigeria’s macroeconomic framework has been reinforced by external validation:
- Moody’s upgraded Nigeria’s sovereign rating to B3 in May 2025, citing improved fiscal discipline and stronger external balance.
- International market participants are increasingly acknowledging Nigeria’s improved reserve position and FX market management.
4.3 Investor Sentiment
Global investors typically interpret a measured rate cut in the context of strong fundamentals as a sign of confidence rather than weakness. By communicating clearly that easing is
conditional and reversible, the MPC can reassure investors while supporting domestic growth.
5. Risks and Mitigation
5.1 Food Inflation Pressures
Food inflation remains vulnerable to supply shocks, insecurity, and weather patterns. However, these are largely structural rather than monetary in nature. Monetary tightening alone cannot resolve these issues. Instead, targeted government policies on agriculture and security are required. The CBN can manage short-term liquidity risks through Open Market Operations and by maintaining a high CRR.
5.2 Global Risks
Global risks such as dollar strength, shifting oil prices, or tightening by the U.S. Federal Reserve may put pressure on emerging market currencies. In such a scenario, the CBN’s asymmetric corridor (+500/-100 bps) and other liquidity tools provide room for quick corrective action.
5.3 Communication Strategy
A critical part of risk management is communication. The CBN must emphasize that any easing will be data-dependent. Should inflationary or FX pressures re-emerge, the MPC retains the tools and willingness to reverse course.
6. Why a 100 bps Cut — and Not More or Less?
A 100 basis point cut strikes the right balance for several reasons:
- Cutting less (e.g., 25–50 bps) may not meaningfully ease credit conditions or send a strong enough signal of policy recalibration.
- Cutting more (e.g., 200 bps) could risk being interpreted as premature or overly aggressive, especially given residual risks around food inflation and global financial
At 26.50%, Nigeria’s policy rate would remain one of the highest in Africa, firmly positive in real terms, and still restrictive enough to sustain disinflation.
7. Broader Implications for the Economy
7.1 Support for SMEs and Manufacturing
Small and medium enterprises (SMEs) are the backbone of Nigeria’s economy, contributing significantly to employment. By modestly reducing borrowing costs, the CBN would help SMEs secure working capital loans, expand operations, and create jobs.
7.2 Improved Consumer Sentiment
Lower inflation combined with slightly lower interest rates will support consumer spending. When households feel more confident about prices and job stability, they are more likely to spend, further driving economic recovery.
7.3 Fiscal-Monetary Coordination
A rate cut would also align with ongoing fiscal efforts to stimulate growth through infrastructure spending and targeted subsidies. This coordination between monetary and fiscal policy strengthens the overall policy mix.
Conclusion: A Case for a Measured Cut
A 100 bps rate cut to 26.50% strikes the right balance. It preserves Nigeria’s positive real rates, acknowledges progress on inflation and FX stability, and provides targeted relief to businesses struggling under high borrowing costs. By pairing this move with continued tight liquidity management, the CBN can reinforce its credibility while supporting sustainable growth.
The September MPC meeting presents a timely opportunity for the Central Bank to pivot cautiously but decisively, towards a more balanced monetary stance.
This article is intended for Medium and corporate blog audiences, blending technical rigor with accessible explanations to help readers understand the rationale behind a potential MPC rate cut.