At its penultimate meeting for the year 2025, the Monetary Policy Committee (MPC) voted to reduce the Monetary Policy Rate (MPR) by 50bps to 27.0%, marking its first rate cut of the year and in about 18 months since it is being used to combat rising inflation. The asymmetric corridor around the MPR was adjusted to -250/+250bps from -100/+500bps, while the Cash Reserve Ratio (CRR) for commercial banks was lowered to 45% from 50%. Meanwhile, the CRR for merchant banks was retained at 16%, and the liquidity ratio was maintained at 30%. In a more targeted intervention, the Committee imposed a special 75% CRR on non-TSA public sector deposits to rein in excess liquidity in the banking system.

The decision to lower the MPR was premised on sustained disinflation over the past five months, expectations of a further decline in inflation through the rest of 2025, and the need to support economic recovery efforts. Notably, headline inflation eased to 20.12% in August, a sharp drop of 1.76% from 21.88% in July, supported by earlier monetary tightening, exchange rate stability, lower logistics costs, and the impact of the harvest season.

While the Committee noted with satisfaction the improvement in macroeconomic stability, it also observed a persistent build-up of excess liquidity in the banking system, driven by fiscal releases from improved government revenue (mostly FAAC). This concern informed the adjustments to the asymmetric corridor and the introduction of the special CRR on non-TSA public deposits. The corridor adjustment is intended to improve interbank market efficiency and strengthen monetary policy transmission, while the special CRR on non-TSAs is designed to enhance liquidity management.

Implications

The MPC’s decision underscores a balance between sustaining disinflation and supporting economic growth. The 50bps MPR cut to 27% and the CRR adjustment for commercial banks signal optimism that inflation is firmly on a downward path and are expected to lower funding costs, ease credit conditions, and stimulate private sector activity. However, the 75% CRR on non-TSA deposits acts as an “insurance” measure, sterilizing fiscal-driven liquidity surges and preventing them from undermining disinflation gains.

For banks, the differentiated CRR introduces both opportunities and challenges. Lower CRR on private deposits should support lending to the real sector, but the immobilization of public funds will deprive some banks of a key source of short-term liquidity, tightening funding conditions until balance sheets adjust. That said, the ongoing recapitalization exercise will provide additional liquidity support for lending, with the CBN confirming that 14 banks have already met the new capital requirements.

For the broader economy, the policy mix helps preserve FX stability, sustain disinflation, and reinforce growth momentum, while also nudging state governments toward greater TSA compliance. For investors, it sends a clear signal: Nigeria is pursuing a cautious but pro-growth monetary stance, designed to safeguard macro stability while supporting recovery.

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