Zero Equilibrium® on the Central Bank of Nigeria's Monetary Policy Committee Rate Decision:

– By Chinedu Okoye 

Introduction:

On May 20th, the central bank of Nigeria @cenbank MPC opted to hold monetary policy rates, as expected by Zero Equilibrium Economists, and also keep Cash Reserve Ratio (CRR) at 45%.

Key decisions of the MPC

• Hold the Monetary Policy Rate at 26.5%,

• Retain the Standing Facilities Corridor around the MPR at +50/-450 basis points.

•Retain Liquidity Ratio at 30%

• Retain the Cash Reserve Requirement (CRR) for Deposit Money Banks at 45.00 per cent, Merchant Banks at 16.00 per cent, and 75.00 per cent for non-TSA public sector deposits.

A Possible Overtightened Market: The Blurring Lines Between Liquidity Tightening.

Holding CRR for DMBs at we view as an essential tightening, cause besides the high CRR is also a liquidity ratio of 30%. And as such, ZE fears this could actually be more contractionary, and driven not by monetary factors but structural and fiscal fears.

In Nigeria, the transmission mechanism of MPR alone is more or less muted as lending rates are already structurally high and credit allocation is distorted, essentially rationed and cautious. However CRR directly sterilizes bank liquidity, so even the distorted market is dried out.

The bank may be moving from “interest-rate tightening”, to “liquidity tightening”. Because whilst money may be adequately priced by the high MPR and customer-end rates, the 45% CRR constrains the availability of money.

In Nigeria, firms in need of credit, complain less about rates, and more about inability to finance working capital needs. So in rasing rates, the Bank maybe reacting to anticipated structural and fiscal excess, and not monetary excesses.

This makes monetary policy more defensible than constructive, with the bank being forced to compensate for weak fiscal credibility. Below ZE challenges not the just the decision, but the internal consistency of the MPC logic, and why extreme reserve sterilization is almost impossible to justify. 

The ZE Economics View:

The issue here is that all 11 committee members of the Committee in attendance voted unanimously to maintain the current benchmark rates and reserve requirements.

From the submissions the decision was based on the break in disinflationary trend and the reemergence of inflation in the past two months. This they attributed to global economic shocks.

However, committee members -in their individual submissions- also agreed that;

i). these shocks were “temporary”, and

ii). that previous contractionary measures were “sufficient” to guide inflation back on a downward.

If both summations hold true, then a reduction in CRR would not really add any feared inflationary pressure. The Bank's admission of non-monetary variables as the major driver of inflation is noteworthy.

The Non-Monetary Nature of the Real Inflationary Pressure:

The real inflationary fear, as mentioned by the Central Bank Governor, Yemi Cardoso, is a structural and fiscal issue - “election spending”. Hence the warning in his remarks that “aggressive political and fiscal spending ahead of the 2027 general elections could trigger fresh inflationary pressures if not closely monitored.”.

With inflation expected to surge as the middle eastern conflict goes on, and Nigeria fairly insulated on the supply-side of consumer end Oil products, holding MPR at 26.5% is the macroprudential thing to do.

However keeping CRR at 45% is the real tightening, for if inflation continues to rise locally, the price increases in production and  consumption goods further depletes the purchasing power of the Naira.

This means more demand for money in an already high-interest rate environment, met with no money supply increases, creating a liquidity constrained economy, further severing the link between industry and the credit market.

A reduction in CRR, which ZE has consistently advocated for since Q3 2025, doesn't automatically lower interest rates which would be the real money supply induced inflationary factor.

This means, more money can be lent, enabling banks fulfill their reserves and regulatory requirements and also increase lending to the private sector. All these absent the real inflationary kick-starter -lower borrowing costs. 

This isn't to say that “there is no real inflationary risk from an lower CRR”, but that the inflationary impact of a moderately reduced CRR is most likely overstated under present credit and growth conditions. 

The risk instead appears under strained liquidity conditions.

The Real Risk:

If working capital needs aren't met, businesses (in need of credit even at these consumer-end rates) either shutdown or reduce operation and production.

Any reduction in or limitation of business expansion (from stifling credit supply), is a major headwind for the economy at the micro (reduced demand for labor, real wage depletion, further constrained growth in real capital formation, and overall output. 

This liquidity tightening is excercebated by the crowding-out effect of deficit financing, as seen in the persistent oversubscription to FGN securities.

Conclusion:

The Bank is essentially basing monetary policy on fiscal conditional fears and this could prove counter-intuitive. For the election spending isn't coming from Bank loans but out of pocket.

If inflationary fears are mostly structural, supplyside, geopolitical or election-fiscal expectations, additional or continuous liquidity tightening may have diminishing anti-inflation effectiveness, as it worsens credit fragmentation.

The Central Bank is prioritizing nominal and stariatical stabilization at the possible expense of financial intermediation, and productive credit and real capital formation.