At its first meeting of the year, the Monetary Policy Committee (MPC) reduced the Monetary Policy Rate (MPR) by 50bps to 26.5%, while retaining all other policy parameters. The asymmetric corridor around the MPR was maintained at +50bps/–450bps, the liquidity ratio at 30%, and the Cash Reserve Ratio for deposit money banks, merchant banks, and public sector non-TSA accounts at 45%, 16%, and 75%, respectively. This signals a cautious shift toward easing amid improving macroeconomic conditions.
Improving Fundamentals Underpin Policy Adjustment
The MPC highlighted continued progress on disinflation, with headline inflation easing to 15.10% in January, marking the 11th consecutive monthly decline. The Committee expects this trend to persist, supported by the lagged effects of prior tightening, currency appreciation, and improved food supply conditions.
External sector dynamics have strengthened, driven by robust capital inflows, higher export earnings, and rising diaspora remittances, improving the balance of payments position and supporting FX market stability. Stability in PMS pricing and easing food supply constraints are also helping to moderate cost pressures. However, the MPC flagged upside risks to inflation, particularly from fiscal releases, including election-related spending.
Financial system resilience remains intact, with 20 of the 33 banks that raised fresh capital already meeting the new minimum capital requirements, reinforcing balance sheet strength.
The Committee reaffirmed its commitment to an evidence-based policy framework, anchored on its core mandate of ensuring price stability and safeguarding financial system resilience.
Economic and Markets Implications
From a macroeconomic perspective, the impact of the 50bps rate cut is expected to be mild, as the retention of other policy parameters continues to impose liquidity constraints, limiting banks’ capacity to significantly expand credit despite the lower policy rate.
For the fixed income market, the cut is also likely to have a modest impact, as investors had largely priced in the possibility of policy easing. In addition, the bearish global oil market could widen Nigeria’s fiscal deficit and increase government borrowing needs, suggesting that interest rates may be maintained at levels sufficiently attractive to investors to support funding requirements.
With respect to equities, while there is typically an inverse relationship between fixed income yields and stock market performance, recent dynamics suggest continued caution. Although yields declined by an average of 200bps at the last bond auction, they remain around the 15% level, which is still compelling for risk-averse investors. Moreover, following the strong equity rally over the past three months, discerning investors may be wary of entering the market at levels perceived as overextended, preferring to wait for a price correction.
That said, the release of audited financial statements and the declaration of corporate actions are expected to be the primary drivers of stock price movements over the near term.