On Tuesday, September 22, the Central Bank of Nigeria surprised almost everyone. After its 307th Monetary Policy Committee meeting, it cut its benchmark rate from 26.5% to 23%, a 350 basis point cut all at once. In Lagos, many economists had expected a symbolic move at best.
The CBN is pointing to figures that have clearly improved. Inflation fell to 15.39% year on year in August, its third monthly decline in a row. GDP grew 4.43% in the second quarter. Foreign reserves were above $55 billion in mid-September, and the current account surplus rose from $4.49 billion in the first quarter to $7.54 billion in the second. Two years ago, the naira was collapsing and prices were climbing at more than 30%. The country has come a long way.
Governor Olayemi Cardoso is careful not to declare victory. He calls the move an « operational reset » rather than easing, and his case is a technical one. Market rates had drifted so far from the official rate that the official rate no longer steered much of anything. Bringing it closer to reality is meant to make the bank’s decisions effective again and to prepare the shift to inflation targeting. To show it is not letting its guard down, the CBN kept the cash reserve requirement for commercial banks at 45%, a level few central banks impose. For merchant banks, it stays at 16%.
Investors got the message. The Lagos stock exchange set a new record right after the decision. The All-Share Index closed at 251,191 points, and market value reached 163.06 trillion naira, about $122.7 billion. Business groups, which had long complained about the cost of credit, welcomed the cut.
Households will have to wait longer to feel it. Banks adjust their rates at their own pace, based on each borrower’s risk, and nothing forces them to follow right away. Small savers may even lose out, since their deposits will earn less. At the market, the shopping basket will not get cheaper overnight. Food prices are still more than 19.5% higher than a year ago.
The coming months will decide the outcome. If inflation keeps falling, the CBN will have won its bet. If it picks up again, the bank will probably have moved too soon and will have to tighten once more. The first answer comes in mid-October, when the September figures are released.