Bottlenecks may limit gains of rate cut - The Guardian Nigeria News

The Central Bank of Nigeria’s (CBN) decision to cut its benchmark interest rate by 350 basis points, from 26.5 per cent to 23 per cent, has been described by economists as a welcome but insufficient response to the pressures confronting manufacturers, small businesses and farmers.

The assessment emerged at a webinar organised by Macrostrat Nigeria Limited, where economists and policy experts examined the implications of the rate cut for the real sector.

The panel, chaired by former President of the Nigerian Economic Society and former member of the Monetary Policy Committee (MPC), Professor Adeola Adenikinju, agreed that the reduction would lower the cost of liquidity and borrowing, but cautioned that it would not automatically translate into increased credit to businesses.

With the cash reserve ratio (CRR) still pegged at 45 per cent, the experts noted that a substantial portion of banks’ deposits remains sterilised, limiting the funds available for lending and potentially encouraging lenders to maintain wide interest-rate margins rather than expand credit to the real sector.

The panellists identified structural, rather than purely monetary, factors as major drivers of Nigeria’s inflation, including high energy and transport costs, weak infrastructure and insecurity in farming communities.

Food inflation stood at 19.57 per cent in August, even as headline and core inflation moved towards the 15 per cent range. The divergence, they said, reflected supply-chain disruptions that could not be resolved through interest-rate adjustments alone.

The experts further pointed to a lag of between six and 12 months between changes in the MPR and their full transmission to lending rates. As a result, they projected that prime and maximum lending rates could remain within the 27 to 30 per cent range for at least six months, limiting immediate relief for manufacturers and small businesses.

They argued that while the MPR cut could eventually improve borrowing conditions, the impact would depend largely on how quickly lower funding costs are transmitted through the banking system.

The panel urged the CBN to retain the current CRR in the short term, while considering a phased reduction linked to banks’ compliance with real-sector lending targets.

They also called for expanded development-finance partnerships to de-risk lending to agriculture and industry, particularly where commercial banks remain reluctant to assume higher credit risks.

The experts urged fiscal authorities to address energy and transport bottlenecks and tackle insecurity in food-producing areas, stressing that monetary easing alone could not resolve the supply-side constraints driving prices and production costs.

They said the effectiveness of the rate cut would ultimately depend on stronger coordination between monetary and fiscal authorities under the recently signed policy coordination framework.