MPR cut brings good news for markets, say analysts

Nigeria’s monetary authority decided on Tuesday to cut the reference rate by up to 350 basis points. Analysts say this could have a generally positive effect.

Arnold Dublin-Green, CIO/COO at BGL Asset Management Limited, told PREMIUM TIMES on Wednesday, "I actually think it’s quite positive. But the risk for the rest of the year is oil price volatility and pre-election spending that might put some pressure, heading into 2027."

He added, "There’ll be a rotation out of fixed income into equities and, generally, equity markets that have a good representation of positive macro. You should see strengthening in equity markets relative to yields in the Treasury bill market. But asset prices as a whole will trade better."

Dublin-Green pointed out that the lower rates are “very supportive for markets.” He mentioned that this cut helps equities more than fixed income and will reduce borrowing costs for the Debt Management Office.

He also noted that the CBN’s OMO bills might drop because of the interest rate cut.

In a surprising move, the CBN reduced the benchmark rate to 23 percent from 26.5 percent during its rate-setting meeting on Tuesday. Olayemi Cardoso, the bank’s governor, described this as “an operational reset” to make monetary policy more effective and support a shift to an inflation-targeting approach.

Mr. Cardoso highlighted the gap between the reference rate and the market rates. He said this gap had weakened how monetary policy works.

Inflation has been easing in Nigeria over the past few months. Consumer inflation fell to 15.39 percent in August, down from 15.43 percent in July. This drop gave the monetary policy committee room to cut rates.

Other positive signs in the economy include a stable exchange rate, with the naira gaining about 8 percent against the dollar this year, and stronger external reserves, now at $55.3 billion, the highest in eighteen years.

These good conditions allowed the CBN to cut the interest rate while in a strong position.

Even with this big cut, the real interest rate, which shows the difference between the nominal interest rate and the inflation rate, remains strong at 7.61 percent. This is one of the highest rates in sub-Saharan Africa, according to Mr. Dublin-Green.

Oluwayemisi Sunmola, a banking research analyst at Vetiva Capital Management, told PREMIUM TIMES, "The reset of the MPR to 23 percent should not be seen as conventional monetary easing, but rather as a recalibration to align the benchmark policy rate with prevailing market conditions."

Sunmola added, "By addressing the disconnect between the MPR and market rates, the recalibration strengthens monetary policy transmission and provides a clearer framework for pricing financial assets."

Matilda Adefalujo, an investment research analyst at Meristem Securities, believes OMO bills will trend toward treasury bills and bonds. She noted that both have seen lower average yields since the rate cut was announced.

She is optimistic that the rate on OMO bills will not drop as fast as those on bonds and treasury bills. She mentioned the need to keep a premium to attract foreign investors and increase external reserves.

Adefalujo told PREMIUM TIMES, "That is going to be helpful for the CBN or the monetary authority to intervene in the FX market and help to sustain the stability of the naira that we’ve already started to see."

She sees the rate cut as a chance for the government to borrow at lower rates. This way, if inflation rises and rates go up again, they will have secured funding at lower costs.