The naira may face depreciation pressure following the Central Bank of Nigeria’s (CBN) decision to cut the Monetary Policy Rate (MPR) by 350 basis points to 23%, according to Bismarck Rewane, Managing Director of Financial Derivatives Company.
Speaking on Channels Television, Rewane described the reduction from 26.5% as a “jumbo cut” and said it could affect the attractiveness of naira-denominated assets, savings and investment flows.
He also highlighted potential benefits for government debt servicing and corporate performance, while calling for stronger fiscal consolidation.
Rewane said the 350-basis-point reduction was significant and could affect the attractiveness of naira-denominated assets to investors.
He noted that the immediate reaction in the foreign exchange market had been relatively muted, with the naira trading around N1,387 to the dollar before briefly weakening to about N1,390 and returning to around N1,387 in the parallel market.
Rewane said the lower interest rate could put pressure on the naira as returns on local assets decline.
He added that diaspora inflows could partly offset weaker foreign portfolio investment.
Rewane said the naira could depreciate but argued that the extent of any decline would depend on broader market conditions.
Rewane said lower interest rates could reduce returns for savers and encourage investors to consider alternative assets.
He said the real rate of return for investors had declined from 11.1% to 7.61%, although it remained attractive for those engaged in carry trades.
He said the lower returns could further weaken national savings, which he described as already low.
He added that investors could move funds into alternative assets if returns on naira-denominated savings fall significantly.
Rewane said lower interest rates could reduce the Federal Government’s borrowing costs and debt-servicing burden.
He noted that the government spends about N15.8 trillion on debt servicing, saying the reduction in interest rates could lower the cost of domestic borrowing.
He also said lower borrowing costs could improve corporate margins and support equity valuations.
Rewane noted that the Nigerian stock market gained 0.18% following the announcement.
Rewane said the impact of monetary easing would partly depend on the government’s ability to strengthen fiscal management and reduce leakages.
While CBN Governor Olayemi Cardoso had spoken about fiscal and monetary coordination, Rewane said the focus should be on fiscal consolidation.
He added that monetary policy alone could not address the country’s economic challenges.
Rewane also noted that the CBN’s easing cycle had taken the MPR from 27.25% in September 2024 to 23%, a cumulative reduction of 4.25 percentage points.
He contrasted this with an approximately nine-percentage-point decline in inflation over the same period.
The CBN reduced the MPR to 23% following its 307th MPC meeting and recalibrated the Standing Facilities Corridor to +50/-300 basis points around the policy rate.
Several experts have described the CBN decision to reduce its benchmark interest rate from 26.5% to 23% as a welcome but unexpected move.
