When the Monetary Policy Committee (MPC) of the Central Bank of Nigeria met last week for its 302nd session, the atmosphere was markedly different from previous gatherings. For nearly two years, Nigerians had grown accustomed to one headline after another: rate hikes, monetary tightening, and stern communiqués warning against the dangers of inflation. But this time, the committee took a different turn.
For the first time in years, the Central Bank decided to cut rates. The Monetary Policy Rate (MPR) was lowered by 50 basis points to 27.0 percent. At the same time, the Standing Facilities corridor was adjusted, the cash reserve requirement (CRR) for commercial banks was raised to 45 percent, and merchant banks kept at 16 percent.
But perhaps the most intriguing measure was the introduction of a 75 percent CRR on all non-TSA public sector deposits — a move that immediately caught the attention of analysts, economists, and bankers across the country.
The decision, in the words of the MPC itself, was “predicated on the sustained disinflation recorded in the past five months, projections of declining inflation for the rest of 2025, and the need to support economic recovery efforts.”
For a committee that has spent years tightening, this was not just a monetary decision — it was a statement of intent.
To understand why the CBN felt confident enough to ease, one must revisit Nigeria’s inflation trajectory over the past year. For much of 2023 and 2024, inflation was unrelenting, spiraling above 25 percent and eroding household incomes. The Bank responded with aggressive hikes, a tough medicine that slowed borrowing, strained small businesses, but gradually began to tame inflationary pressures.
By August 2025, headline inflation had eased to 20.12 percent, down from 21.88 percent in July. On a month-on-month basis, it fell sharply to 0.74 percent from 1.99 percent. Core inflation also declined, and food inflation, though still high, showed its first meaningful signs of relief in months.
Behind the numbers was a combination of factors: the relative stability of the naira, moderation in petrol prices, a surge in crude oil output, and improved capital inflows.
“The Bank had every reason to take this decision now,” said Dr. Tunde Olayemi, a Lagos-based economist. “We are seeing five straight months of disinflation, which is not a fluke. This is a credible trend, and it opens the window for some easing to support growth without losing the fight against inflation.”
Indeed, the MPC was keen to emphasize that Nigeria’s economy is resilient. The second quarter GDP numbers showed growth of 4.23 percent year-on-year, compared with 3.13 percent in the first quarter.
Oil production rebounded, recording a remarkable 20.46 percent growth compared to less than 2 percent in the previous quarter. External reserves climbed above $43 billion, covering more than eight months of imports, while the current account balance swung to a healthy surplus.
It was against this backdrop of stability that the MPC felt emboldened to shift gears.
Why the 75% CRR Matters
While the rate cut grabbed headlines, the real story lies in the CBN’s less glamorous but more consequential measure: a 75 percent cash reserve requirement on non-TSA public deposits.
For years, excess liquidity in Nigeria’s financial system has been the silent saboteur of monetary policy. Every month, the Federation Account Allocation Committee (FAAC) disburses trillions of naira to states and local governments. Much of that money ends up parked in commercial banks, only to re-enter the economy in a flood of lending, speculative trading, and demand pressures.
The result is predictable: whatever gains the CBN achieves through interest rates are often drowned by the tide of liquidity from FAAC allocations.
By imposing a 75 percent CRR on public funds held outside the Treasury Single Account, the apex bank has effectively turned off one of the biggest taps of inflationary liquidity. Out of every N100 deposited by a state government in a commercial bank, N75 will now be sterilized at the CBN, leaving only N25 for circulation.
“This is the real genius of the decision,” argued Bismarck Rewane, a respected financial analyst. “If the Bank had simply cut rates without addressing liquidity, the system would have been flooded again. But this measure takes care of the elephant in the room. It ensures the rate cut can support growth without fueling inflation.”
Bankers may grumble about reduced profitability, but the broader system gains in stability. As one chief executive of a Tier-1 bank, who asked not to be named, put it: “Yes, it reduces what we can do with government deposits, but the truth is that we’ve all seen how FAAC injections destabilize the market every month. This is a bold move to restore order.”
Unlike in the past, the MPC was careful not to project the cut as a wholesale embrace of dovishness. Instead, it was framed as a cautious step, backed by data.
Governor of the CBN, Mr. Olayemi Cardoso who read the communique highlighted that inflation has not only decelerated but that expectations are also better anchored.
Exchange rate stability has held for several months, thanks to improved oil earnings and capital inflows. The harvest season is expected to boost food supplies, while crude output should keep external reserves robust. In short, the stars are aligned for a limited easing.
“The rate cut was overdue,” said Dr. Chioma Nwankwo, an investment strategist. “But what makes it impressive is that it is coupled with prudence. The Bank is not loosening recklessly. It is loosening with one hand, while tightening the other with the CRR. That is how you maintain credibility.”
Indeed, credibility remains at the core of the bank’s approach. After years of painful tightening, any sign of recklessness would have rattled investors and markets. Instead, the message was clear: Nigeria’s central bank is easing, but it has not lost its grip.
Another layer of the MPC’s decision was the adjustment of the Standing Facilities corridor to +250/–250 basis points around the policy rate. To a lay observer, this may seem technical, but its purpose is simple: to ensure that changes in the policy rate translate into real changes in market lending rates.
For years, inefficiencies in Nigeria’s interbank market have weakened monetary transmission. The corridor adjustment is meant to stimulate greater activity, improve stability, and make the rate cut meaningful for businesses and households.
“People often underestimate these technical tweaks,” noted Ayodele Adebayo, a former commercial banker. “But without efficient transmission, the rate cut would remain on paper. What the CBN has done is to make sure the cut is felt in the interbank market and, by extension, in the cost of credit.”
Still, challenges remain. Inflation, at 20 percent, is not exactly tamed. Fiscal discipline is uncertain, especially with states under pressure to spend their FAAC allocations quickly. Banks may find creative ways around the CRR burden. And global headwinds — from geopolitical tensions to supply chain disruptions — could still rattle Nigeria’s external balances.
Some analysts have warned that easing too soon could risk reversing the gains of disinflation. Others worry that banks, facing reduced profitability from the higher CRR, may respond by widening lending margins, undermining the intended relief for businesses.
But for now, the consensus is that the CBN has struck a delicate balance.
In the end, what happened at the 302nd MPC meeting was more than a rate cut. It was a carefully calibrated pivot in Nigeria’s monetary policy — one that recognizes the country’s improved fundamentals, while guarding against familiar pitfalls.
For the first time in years, the Central Bank has signaled that it can support growth without abandoning the fight against inflation. By pairing a modest rate cut with a bold CRR clamp, it has found a way to ease without letting go.
“The decision is both symbolic and substantive,” said Dr. Olayemi. “Symbolic, because it shows that the Bank is responsive, not rigid. Substantive, because the CRR measure addresses a structural problem that has plagued our system for years.”
As Nigerians watch prices, borrowing costs, and economic activity in the coming months, the real test will be whether this balancing act holds. For now, though, the CBN has earned a rare moment of commendation: it has shown that monetary policy, even in difficult terrain, can be both pragmatic and principled.
