MPR Cut: Why cheaper loans may not come soon

Economists and financial analysts have offered mixed views on the immediate impact of the Central Bank of Nigeria’s (CBN) decision to cut the Monetary Policy Rate (MPR) by 350 basis points.

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The economists said the move could reduce borrowing costs but may take time to translate into cheaper credit for businesses and consumers.

CBN on Tuesday cut the benchmark interest rate to 23 per cent from 26.5 per cent and recalibrated the policy corridor as part of what it described as an operational realignment aimed at strengthening monetary policy transmission.

The rate cut is the lowest since February 2024, when it was pegged at 22.75 per cent.

The apex bank said its previous reforms improved Nigeria’s macroeconomic conditions and that the latest policy reset was intended to strengthen the operation of monetary policy without abandoning its focus on inflation.

This decision followed two consecutive retention of the Monetary Policy Rate (MPR) at 26.5 per cent, holding it at that level in May and July, following a 50-basis-point reduction in February from 27 per cent.

Meanwhile, CBN cut the interest rate amid its continued efforts to moderate Nigeria’s headline inflation. The regulator said the effort was to reset the monetary policy.

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Since CBN maintained the rate in May, inflationary pressure has generally eased, with headline inflation standing at 15.39 per cent in August, down from 15.43 per cent in July, 15.91 per cent in June and 15.93 per cent in May, according to the National Bureau of Statistics (NBS).

Speaking on the implications of the decision, Shakirudeen Taiwo, chief macroeconomist at Cordros Securities Limited, said the policy rate cut was likely to have different effects across various segments of the economy.

“The bottom line is that the policy rate recalibration is likely to produce differentiated effects across the economy. Banks and leveraged real-sector corporates are likely to capture most of the direct benefits, while the main adverse effects should fall on savers and holders of short-duration financial assets,” Mr Taiwo said.

Impact on banks

According to the economist, the immediate effect on banks as lenders would be the repricing of loans, as many Nigerian corporate facilities are priced using the MPR plus a spread.

He said the 350-basis-point reduction should eventually lower borrowers’ interest expenses, although the initial impact could favour banks because deposit rates are likely to adjust faster than loan rates.

“With the SDF floor dropping to 20%, banks can reduce deposit rates on savings, terms and wholesale deposits, while the loan book reprices only on a lag as facilities reach their reset dates.

“This should support net interest margins (NIMs) over the first one or two quarters, before asset yields increasingly offset the benefits of cheaper CASA,” Mr Taiwo said.

The macroeconomist, however, said the impact would not be uniform across banks. According to him, Tier-1 banks, whose cost of funds is already low, could also gain from securities revaluation and stronger loan growth.

“Tier-1 banks with a high proportion of low-cost CASA deposits are relatively better positioned – their cost of funds is already low, limiting the scope for further cost savings as deposit rates decline. These banks (the FUGAZ – First Bank, UBA, GT, Access and Zenith) could also gain from securities revaluation and stronger loan growth,” he said.

Mr Taiwo added that banks with higher funding costs could face greater earnings pressure as income from the Standing Deposit Facility (SDF) declines while lending rates also reprice lower.

He said lower debt-service burdens for existing floating-rate borrowers could reduce repayment pressure and, at the margin, support asset quality, particularly in sectors such as power, manufacturing and real estate.

However, he noted that the 45 per cent cash reserve requirement (CRR) would remain a major constraint on the ability of banks to expand lending rapidly.

CRR may limit credit expansion

Mr Taiwo said the unchanged CRR could limit the extent to which the reduction in the policy rate translates into increased credit to the real sector.

“The binding constraint CRR at 45%. This is the crux and the reason to temper the ‘credit boom’ story. A 45% CRR materially limits the share of deposit funding that banks can allocate to earning assets, constraining the quantity-side transmission of lower policy rates to new lending.

“With the CBN leaving the CRR unchanged, the capacity for rapid loan-book expansion remains constrained. It is therefore expected that the initial benefit to bank profitability will be more immediate than the expansion in real-sector credit, which is likely to remain gradual and selective while the CRR remains unchanged,” he added.

The economist, Mr Taiwo, said the reduction in the policy rate would also compress banks’ low-risk investment income, potentially encouraging them to redirect liquidity towards lending or longer-duration securities.

He noted that banks with significant fair-value exposure to Federal Government bonds could record valuation gains as market yields decline, depending on the duration and accounting classification of their portfolios.

Impact on manufacturers

On the real sector, Mr Taiwo said the benefits of the rate cut would be greatest for businesses that are highly leveraged, predominantly naira-funded, long-duration and sensitive to financing costs.

He said manufacturers could experience some relief because the sector is heavily dependent on working capital, but warned that other factors, particularly foreign exchange availability and energy costs, remain more important drivers of profitability for many manufacturers.

“For the manufacturing and industrial sector, there is an anticipated modest positive impact. The sector is working-capital-heavy, so downward repricing of loans or credit facilities helps cash flow.

“However, most manufacturers in Nigeria are import-dependent for their intermediate goods and raw materials, making FX availability and energy costs more important drivers of profitability than the domestic cost of naira funding,” he said.

As a result, he said the 350bps reduction should therefore provide some relief, but is likely to remain a secondary driver of sector performance.

Mr Taiwo also said the direct impact on households could be limited because consumer credit remains shallow in Nigeria.

The economic expert said personal loans, auto finance, digital and consumer lending, mortgages, and other floating- or MPR-linked facilities could reprice downward, but the high cost of consumer lending would limit the immediate benefit to borrowers.

While borrowers and some businesses could benefit from lower interest rates, Mr Taiwo said savers and investors holding short-duration financial assets could face weaker returns.

“As the SDF rate falls to 20%, deposit rates and money-market yields are likely to decline, reducing returns for savers and short-duration fixed-income investors.

“With headline inflation still at 15.39% y/y, lower nominal savings rates would further compress real returns,” he said.

He said households holding cash or short-duration deposits would consequently experience lower nominal returns as the new policy-rate regime feeds through the financial system.

Delayed effects on borrowers

Adegbemi Onakoya, professor of development economics at Babcock University and of business and applied economics at Crescent University, said the lower MPR should theoretically translate into lower borrowing costs for banks and, eventually, reduce lending rates.

He, however, said the effect would not be immediate because of existing loan agreements between banks and borrowers.

“Obviously, a lower interest rate occasioned by the MPR that came down by 350 basis points means that the rate at which the banks will borrow from the CBN is down 23 per cent.

“But, what’s important is the asymmetric corridor, which is +50/-300,” the academic, Mr Onakoya, said.

He said the new corridor would also affect the rate at which banks lend and borrow among themselves, potentially allowing lending rates to fall from their current levels.

“What should happen is that banks will loan at a lower interest rate, away from the 30-33 per cent we used to have. Maybe the rate will drop to about 27 per cent or 26 per cent.

“If such a fund is cheaper, then the banks will now be able to lend to manufacturers and other consumers of credit at lower rates which will bring the cost of production down and reduce cost push inflation. That’s the theory,” he said.

Mr Onakoya, however, said existing contractual agreements could delay the transmission of the lower policy rate to borrowers.

“But that may not happen in the short run because they have already committed loans that manufacturers and borrowers have contracts with the banks, and the banks will insist on 35 per cent or 33 per cent that currently exists.

“So I do not see any immediate impacts in the short run because of these contractual agreements for the lending of the funds,” he added.

He said the reduction nevertheless brought the MPR closer to prevailing conditions in the banking system, where banks had been borrowing from the CBN at rates below the previous MPR.

He said the behaviour of Treasury bill yields would be an important indicator of whether the policy adjustment was effectively transmitted through the financial market.

“The litmus test is the CBN treasury bill. Let’s see how the treasury bill will be, that will show the reflectiveness of that policy,” Mr Onakoya said.

Calculated risk

Aliyu Ilias, an economist, development expert and partner at CSAL Advisory, described the rate cut as a calculated risk by the CBN, noting that the size of the reduction had surprised market observers.

“I think it’s a calculated risk and the signal that it dropped to 23 per cent is surprising and no one sees it coming, we are expecting it to ease like five per cent,” Mr Ilias said.

He said the adjustment to the policy corridor could be beneficial to small businesses and manufacturers by potentially lowering their borrowing costs.

“But the one on the corridor, we used to have plus and minus. It’s a good signal for small businesses and manufacturers, it simply means that you can borrow less than what we were borrowing before.

“It shows that manufacturers can now get more money and expand their businesses through capital availability,” he said.

According to him, increased access to capital could allow businesses to expand production and employment.

“And where there is capital availability, they can produce and employ more, and people will have more jobs; it’s a calculated risk by the CBN,” he said.

CBN also clarified on Tuesday that its decision to reset the MPR to 23 per cent does not constitute monetary policy easing.

The regulator said the changes were intended to strengthen the transmission of monetary policy and reinforce the MPR as the primary signal of monetary policy.

Mr Ilias said the CBN’s clarification that the MPR cut did not constitute a broad easing of monetary policy was important for managing expectations.

“The clarification that the 23 per cent MPR does not mean easing monetary policy is instructive so people won’t think everything has become better, but for volatility we are still experiencing in the world, the cut is surprising, but, overall it’s a good one,” Mr Ilias said.