Sustaining FX Stability, Investors’ Confidence With MPC Decisions

The Monetary Policy Committee (MPC) decisions during the just concluded 302nd meetings in Abuja opened a new chapter in credit access for businesses. The decisions, including interest rate cut to 27 per cent will attract new investments, and support job creation. By lowering interest rate, the committee begins a new season of monetary easing to sustain disinflation, output growth, stable naira and robust external reserves. The expected surge in credit access supports Central Bank of Nigeria (CBN’s) continued push for expansive private sector that contributes immensely to government’s $1tn economy plan.

For the first time in five years, the Central Bank of Nigeria (CBN)-led Monetary Policy Committee (MPC) decided to cut interest rate after a decisive meeting held in Abuja.

The cutting of its benchmark interest rate by 50 basis points to 27 per cent on September 23, comes after a long tightening cycle aimed at curbing runaway inflation.

The Committee acknowledged the continued stability of the foreign exchange market and its critical importance in achieving rapid disinflation, and therefore called on the CBN to continue the implementation of policies that boost capital inflows and deepen foreign exchange liquidity.

It also adjusted the Standing Facilities corridor around the MPR to +250/-250 basis points, adjusted the Cash Reserve Requirement (CRR) for commercial banks to 45 per cent while retaining that of merchant banks at 16 per cent.

The committee also introduced a 75 per cent CRR on non-Treasury SA public sector deposits and kept the Liquidity Ratio unchanged at 30.00 per cent.

The Committee’s decision to lower the monetary policy rate was predicated on the sustained disinflation recorded in the past five months, projections of declining inflation for the rest of 2025 and the need to support economic recovery efforts.

The MPC expressed satisfaction with the prevailing macroeconomic stability, evidenced by the improvements in several indicators. These include the sustained disinflation, improved output growth, stable exchange rate and robust external reserves.

It particularly noted the increased momentum of disinflation in August 2025, being the highest in the past five months.

This deceleration, underpinned by monetary policy tightening, exchange rate stability, increased capital inflows, and surplus current account balance, have helped to broadly anchor inflation expectations.

Other factors that contributed to the deceleration include the continued moderation in the price of Premium Motor Spirit (PMS) and the notable increase in crude oil production.

In the view of the Committee, the stability in the macroeconomic environment offered some headroom for monetary policy to support economic recovery.

Notwithstanding the consistent deceleration in inflation, the Committee observed the persistent build-up of excess liquidity in the banking system, resulting largely from fiscal releases emerging from improved revenues.

Being mindful of the need to preserve the prevailing macroeconomic stability, the MPC noted the risk posed by excess liquidity in the banking system.

Members noted that effective functioning of the interbank market remains critical to enhanced transmission of monetary policy.

This, therefore, informed the decision to adjust the width of the standing facilities corridor to boost interbank market transactions and enhance the stability of the market.

What The CBN Is Doing

Announcing the outcome of the September MPC meeting in Abuja, CBN Governor Olayemi Cardoso said the change in policy stance was based on review of macroeconomic developments.

According to him, the decision by the MPC to ease the policy stance was made in the light of improving inflation trends.

“The committee’s decision to lower the monetary policy rate was predicated on the sustained disinflation recorded in the past five months, projections of declining inflation for the rest of 2025 and the need to support economic recovery efforts,” Cardoso said.

Cardoso explained that the introduction of new measures was aimed at strengthening monetary control, improving liquidity management, and reinforcing the TSA regime.

In its efforts to tame inflation, the CBN recently hosted the Monetary Policy Forum 2025, featuring fiscal authorities, legislative, private sector, development partners, subject-matter experts, and scholars with the theme: “Managing the Disinflation Process”.

The forum is a major push to improve monetary policy communication, foster dialogue, and collaborate on critical issues shaping monetary policy.

During the event, Cardoso explained that the apex bank’s focus is to sustain price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship.

He said the apex bank is continuing its disciplined approach to monetary policy, aimed at curbing inflation and stabilising the economy.

Cardoso reiterated that the goal of the CBN is to ensure that monetary policy remains forward-looking, adaptive, and resilient.

In addressing our economic challenges, collaboration is key: “Managing disinflation amidst persistent shocks requires not only robust policies but also coordination between fiscal and monetary authorities to anchor expectations and maintain investor confidence,” Cardoso said.

“Our focus must remain on price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship,” he added.

The CBN also focused on strengthening the banking sector, introducing new minimum capital requirements for banks (effective March 2026) to ensure resilience and position Nigeria’s banking industry for a $1tn economy.

These reforms and developments reflect the Bank’s commitment to creating an enabling environment for inclusive economic development. However, achieving macroeconomic stability requires sustained vigilance and a proactive monetary policy stance.

“As we shift from unorthodox to orthodox monetary policy, the CBN remains committed to restoring confidence, strengthening policy credibility, and staying focused on its core mandate of price stability,” Cardoso stated.

He said moving from the exchange rate targeting framework to the inflation targeting framework aligned with the apex bank’s determination to bring inflation upsurge under control in line with its price stability mandate.

Inflation uptick has remained a major concern to the CBN and is the time to use monetary policy tools to control it.

The National Bureau of Statistics (NBS) latest Consumer Price Index (CPI) report showed that headline inflation rate dropped from 21.88 per cent in July to 20.12 per cent in August.

For the CBN-led MPC, inflation has continued to moderate, and the naira has remained relatively stable.

Views From Stakeholders

Partner & Corporate Finance Expert at TNP, Bukola Bankole, said that by lowering the benchmark rate by 50bps to 27 per cent, the MPC made a modest but symbolic move as it marks the first break from months of aggressive tightening. For businesses already borrowing at rates above 30 per cent however, this adjustment will not ease financing costs immediately, but it signals recognition that growth cannot be perpetually stifled in the name of inflation control.

“For investors, Nigeria’s yield story remains unchanged because even after the cut, local instruments remain among the most attractive across frontier and emerging markets. So, a half point change does little to alter that. The real test is whether inflation starts to ease and whether the Naira can achieve meaningful stability”.

“As we all know, inflation in Nigeria is not demand-driven; it is cost-push, reflecting exchange rate volatility, the knock-on effects of subsidy removal, high energy costs, and food supply disruptions. So certainly, against this backdrop, further hikes would have been the wrong medicine,” she said.

“I will say this MPC decision reflects an effort to balance vigilance on inflation with the need to create space for credit expansion and investment. The real challenge however remains consistency, as without predictable policy, stronger fiscal alignment, and structural reforms that address the root causes of inflation, this cut will remain symbolic as with a lot of other actions previously taken”.

“If those elements are however in place, then this small cut could truly mark the beginning of a more sustainable policy mix that supports growth without abandoning the fight for price stability”.

Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the remainder of 2025 appears poised for a stronger performance, with foreign currency inflows and stable commodity prices providing support. December is shaping up as an upbeat period, boosted by diaspora remittances, “Detty December”, and increased spending on concerts, films, and festivals.

“The naira should remain stable around N1,500–N1,550/$, and headline inflation could ease to 20 per cent. The MPC is also likely to cut rates in November, sustaining optimism into the festive season,” he said.

Rewane, said that with inflation easing for the fifth consecutive month to 20.12 per cent in August, the MPC’s decision to cut interest rate by 50 basis points slightly reduce the government’s debt service burden while keeping yields attractive enough to sustain Foreign Portfolio Investment inflows.

Head of Research at Commercio Partners, Ifeanyi Ubah, explained that food inflation declined both on a year-on-year and month-on-month basis, supported by increased commodity supply as we are in the harvest season.

“This easing in food inflation is a positive signal for the MPC, adding that the continued moderation in food prices gave the MPC greater confidence to implement a rate cut.

The Cordros Securities analysts said: “The MPC is reassessing its current policy stance, supported by sustained improvements in key indicators (inflation and the exchange rate) and a more positive outlook. The Committee considered recent shifts globally to monetary easing, following the US Fed’s rate cut and the prospect of further policy accommodation in near future periods. This should be positive for capital flows into emerging and frontier markets, including Nigeria, adding an additional layer of support to engender continued exchange rate stability”.

“That said, we expect the Committee to remain cautious, balancing growth-supportive measures with its core mandate of maintaining price stability. Specifically, we believe that the monetary easing will be carefully calibrated in an effort to ensure that interest rates remain competitive enough to continue to attract capital inflows and anchor inflation expectations,” they said.

Also, the naira continues to appreciate in September, trading at an average rate of N1,530/$ in the first half of the month. It peaked at N1,541/$ on September 1 before following an upward trend to reach its strongest level of N1,520/$ on September 8.

This appreciation is driven by a 26 per cent year-on-year increase in foreign exchange inflows and the Central Bank of Nigeria’s contractionary monetary policy aimed at curbing inflation.

“As inflation gradually eases, investor confidence improves, strengthening the naira by enhancing purchasing power and easing pressure on the exchange rate. With December approaching, heightened economic activity and festive spending are expected to inject more dollar liquidity into the economy. It’s also worth noting, that the main crop cocoa is underway till January; this typically leads to higher export earnings, providing additional support for the naira’s positive momentum,” they said.

Global Perspectives To Monetary Policy

The MPC took a cue from the US Federal Reserve which for the first time this year, lowered the federal funds rate, after five consecutive sessions of holding rates steady, cutting the policy rate by 25bps to a range of 4 per cent to 4.25 per cent at its September meeting.

The decision reflects the Fed’s increasing focus on labour market weakness, as rising unemployment risks outweigh lingering inflationary pressures.

Elsewhere, the Bank of England cut its benchmark rate by 25bps to four per cent in August, citing subdued growth and a weakening labour market, but held it steady in September amid concerns over upside risks to medium-term inflation.

Meanwhile, the European Central Bank maintained its key policy rates, including the deposit, main refinancing operations, and the marginal lending facilities, at two per cent, 2.15 per cent, and 2.40 per cent, respectively, at the September policy meeting, marking the second consecutive period after a cumulative 100bps decrease this year.

The decision to keep rates steady was driven by the need to balance easing inflation with resilient economic conditions and external uncertainties.