All Eyes on CBN as Fed, Other Central Banks Cut Rates

The possibility that the Central Bank of Nigeria (CBN) will cut the benchmark interest rate seems tempting than maintaining the status quo when its committee meet next week.

Its two-day bi-monthly Monetary Policy Committee (MPC) meeting has been scheduled to be held on Monday, September 22 and Tuesday 23.

CBN has held the rate unchanged since the beginning of the year in its last three consecutive meetings, having hiked the rate six times last year by a cumulative 875 basis points to 27.5 per cent.

At its last MPC meeting in July, the CBN Governor, Olayemi Cardoso, had said that maintaining the current policy stance would continue to address the existing and emerging inflationary pressure.

“The MPC will continue to undertake rigorous assessment of economic conditions, price development and outlook to inform future policy decisions,” he added.

Pinnacle Daily reports that a benchmark interest rate is the official rate that guides financial institutions on the proper cost of funds and lending businesses, including micro, small, and medium enterprises.

The anticipation that CBN will moderate the rate, analysts say, is underpinned by the relative stability in the economy.

Specifically, they point to the deceleration of headline inflation for the fifth consecutive month to 20.12 per cent in August and from 34.8 per cent in December 2024.

Other internal mechanisms they noted include the stability in the foreign exchange market, as the naira is gaining against the dollar.

They also cited last week’s sweeping decisions by the United States (US) Federal Reserve and other central banks to have either cut or retained rates.

US Fed cuts rate

The Federal Reserve (Fed), known as the US central bank on Wednesday, September 17, lowered interest rates for the first time this year, flagging slower job gains and risks to employment as policymakers face heightened pressure under the President Donald Trump administration.

The Fed cut the benchmark lending rate by 25 basis points, to a range between 4.0 per cent and 4.25 per cent, while pencilling in two more potential cuts this year.

According to the Fed Chairman, Jerome Powell, the central bank was “right to wait and see how tariffs and inflation and the labour market evolved” before lowering rates for the first time in nine months.

Canada cuts rates

The Bank of Canada also reduced its key policy rate to a three-year low of 2.5 per cent on Wednesday, the first cut in six months, with readiness to cut again if risks to the economy increased in the coming months.

The 25-basis-point cut reflected a weak jobs market and less concern about underlying pressures on inflation.

According to the Bank of Canada Governor, Tiff Macklem, the damaging effect of US tariffs meant considerable uncertainty remained, noting that with a weaker economy and less upside risk to inflation, the governing council judged that a reduction in the policy rate was appropriate to better balance the risks going forward.

Ghana cuts rate

Here in Africa, Ghana’s central bank delivered another larger-than-expected rate cut on Wednesday, citing a sustained decline in inflation and an improving macroeconomic outlook in the West African gold and cocoa-producing nation.

The bank slashed its main interest rate, opens a new tab by a record 350 basis points to 21.5 per cent, after a 300 basis point reduction at its July MPC meeting.

With Ghana’s economy showing stability, its headline inflation has fallen for the eighth straight month to 11.5 per cent in August, the lowest since October 2021.

The Bank of Ghana Governor, Johnson Asiama, noted that given the current state of the country’s macroeconomic conditions, the view of the committee was that inflation would continue to ease in the near term.

BoE kept the status quo

On Thursday, September 18, the Bank of England (BoE) retained the country’s interest rate at 4 per cent.

The bank expected that inflation would return to its key target of two per cent, but remains cautious on when it will trim borrowing costs again.

The BoE noted the country has witnessed substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy.

Other central banks’ decisions

On its part, the Bank of Japan held the key rate steady at 0.5 per cent as expected amid Trump’s tariffs, seen as a key risk to the country’s outlook.

The South African central bank also held the key rate at seven per cent in a tight decision to assess the impact of earlier cuts.

CBN may be tempted to cut rate

Analysts anticipate that the CBN will be tempted to cut the rate but will be guided considerably by its internal mechanism rather than external factors.

“One thing that we’ve realised is that they [CBN] have their own internal mechanism of monitoring the inflation,” the Head of Financial Institutions Rating at Agusto & Co, Ayokunle Olubunmi, told Pinnacle Daily.

He explained that if inflation is trending down significantly and foreign exchange inflow is improving, there is the possibility that the CBN might cut the rate.

“Don’t forget that the higher rate is what they [CBN] are using to attract foreign portfolio investment (FPI),” Olubunmi said.

He noted the CBN has been cautious in the last couple of months since headline inflation started to trend downward, not to cut the rate.

“Although we can see some level of stability in the economy but it is very fragile now, so I don’t see a significant rate cut now,” Olubunmi explained.

He thinks the CBN might not be tempted to cut rates as other central banks have done last week, pointing out that every economy has its own peculiarities.

“For instance, the central bank of Kenya has embarked on an expansionary measure since last year, cutting the rate significantly, but we have to look at our domestic market and the challenges we have and manage the economy well. So, we won’t just focus on what is happening externally,” Olubunmi stressed.

With the Fed and BoE delivering rate cuts in the past week, Cowry research analysts said that while the disinflation momentum provides a window for policy flexibility, residual risks from FX pass-through, food supply bottlenecks, and global oil price volatility suggest the committee may tread cautiously in balancing the goals of anchoring inflation expectations with supporting growth.

“Still, Cowry Research thinks the MPC may tread carefully, given lingering risks from FX pass-through, structural food supply pressures, and the sticky trajectory of core inflation. In our view, the committee is more likely to strike a balanced tone—acknowledging the easing price pressures while keeping its guard up against residual risks to price stability,” the analysts stated.

Impact of Fed, other central banks’ rates cut

The Fed and central bank rates cut is a plus for Nigeria to attract more investors into its domestic market.

While Nigeria’s inflation has tempered downward, US inflation has increased, and the FED has cut its rate by 25 per cent, the Chief Executive Officer of Financial Derivatives Company Limited, Bismarck Rewane, noted while speaking on Thursday, September 18, on Channels Television’s Business Morning programme.

He posted an assumption that if CBN brings down the interest rate from 27.5 per cent to 27.25 per cent, the interest rate differential will be in favour of Nigeria, and two things will happen.

“One, the naira will not be pegged in the foreign exchange market because of a reduction in interest rate. You bring down the interest rate by 25 basis points, and the naira strengthens.

“Two, the cost of borrowing, that debt service by the government will come down, then Nigeria will raise additional funds,” Rewane explained.

Olubunmi added that, going by the level of stability in its economy, Nigeria is open to foreign investor attraction, stressing that the Feb cutting means foreign investors may explore the Nigerian market.