The naira could come under renewed depreciation pressure following the Central Bank of Nigeria’s decision to cut its benchmark interest rate to 23 per cent, financial analyst Bismarck Rewane has warned.
Rewane, Managing Director of Financial Derivatives Company, said the 350-basis-point reduction in the Monetary Policy Rate (MPR) could make naira-denominated assets less attractive to investors, potentially affecting savings, capital flows and demand for the local currency.
Speaking on Channels Television, Rewane described the reduction from 26.5 per cent to 23 per cent as a “jumbo cut”, stressing that the size of the reduction represented a significant shift in monetary policy.
“So it’s a jumbo cut from 26.5% to 23%, 350 basis points is huge by any stretch of imagination. So that’s a big risk,” he said.
The analyst, however, noted that the immediate reaction in the foreign exchange market had been relatively limited. He said the naira was trading at about N1,387 to the dollar before briefly weakening to around N1,390 and subsequently returning to approximately N1,387 in the parallel market.
According to Rewane, the longer-term effect could be more pronounced if lower interest rates reduce the returns available on naira assets and consequently alter investor behaviour.
“Effect of a 1% rate cut, return on savings will fall by 0.12%. The stock market, potentially positive,” he said.
Diaspora inflows may cushion investment outflows
Rewane said weaker returns on domestic assets could discourage some foreign portfolio investment, although he suggested that inflows from Nigerians living abroad could provide a partial counterbalance.
“Diaspora flows will be a substitute for the foreign portfolio investments,” he said.
He acknowledged that the naira could depreciate as a result of the lower interest-rate environment but said the extent of any movement would depend on broader market dynamics.
“…the Naira may depreciate, but not as much …, because the Naira fair value is about 1,150 Naira to a dollar,” he said.
His comments come as investors assess the implications of the CBN’s latest monetary easing for the foreign exchange market, fixed-income investments, savings and equities.
Savers may feel the impact
Beyond the currency market, Rewane said the reduction in interest rates could have a direct effect on savers by lowering the returns available on naira-denominated deposits and investments.
He said the real rate of return available to investors had fallen from 11.1 per cent to 7.61 per cent. Despite the decline, he said the return remained attractive to investors pursuing carry-trade opportunities.
“The real rate of return for investors here dropped from +11.1 to +7.61, it’s still very good for those who involve themselves in carry trade,” he said.
Rewane expressed concern that lower interest rates could further weaken domestic savings, which he described as already low.
“Savings are a function of interest rates, very sensitive. You either save or you consume, but the amount, national savings is very low. So when you do this, it falls further,” he said.
He warned that a sustained decline in returns could prompt investors and savers to seek alternative stores of value, including foreign currencies and digital assets.
“The danger is that you may then begin to start to buy alternative assets. Which includes dollars, Bitcoin, we don’t know,” he said.
Such a shift, if it occurs on a significant scale, could have implications for demand for foreign exchange and the broader financial system, particularly if domestic investors increasingly seek protection against inflation or currency depreciation.
Government could benefit from lower borrowing costs
While highlighting the potential risks, Rewane also pointed to some benefits from the CBN’s decision, particularly for government finances.
He said lower interest rates could reduce the cost of domestic borrowing and ease the Federal Government’s debt-servicing burden.
The analyst put the government’s debt-servicing expenditure at about N15.8 trillion, arguing that a sustained reduction in borrowing costs could free up funds for other government priorities.
“Government debt service, I think it’s important that we are spending about N15.8 trillion on debt service. By cutting this down sharply, the amount of money government is going to spend on debt service is actually going to reduce,” he said.
Lower interest rates could also provide relief to businesses that depend on credit to finance operations and expansion.
Rewane said cheaper borrowing could improve corporate profit margins and, in turn, support share prices on the Nigerian Exchange.
“If you are borrowing and you reduce that, then your margins will increase, and therefore your stock price will also increase, and that plays into the interest rates going to inverse relationship with equities,” he said.
The Nigerian stock market gained 0.18 per cent following the rate-cut announcement, reflecting some of the positive expectations surrounding cheaper financing and improved corporate earnings.
Rewane urges fiscal consolidation
Despite the potential benefits of monetary easing, Rewane said the government must complement the CBN’s actions with stronger fiscal management.
He argued that greater emphasis should be placed on fiscal consolidation rather than relying solely on coordination between monetary and fiscal authorities.
“I think the real issue is not coordination, it is to achieve fiscal consolidation, that is, you achieve price stability by blocking leakages. And so the fiscal authorities have their job cut out for them,” he said.
His position underscores the limits of monetary policy in addressing structural economic challenges. While lower interest rates can stimulate borrowing and investment, fiscal discipline and effective management of government finances remain important to the broader stability of the economy.
CBN continues easing cycle
The latest decision extends the CBN’s monetary easing cycle, which has progressively lowered the MPR from 27.25 per cent in September 2024 to 23 per cent.
Rewane noted that the cumulative reduction in the benchmark rate now stands at 4.25 percentage points, while inflation has declined by roughly nine percentage points over the same period.
The CBN announced the latest reduction after the 307th meeting of its Monetary Policy Committee. Alongside the MPR cut, the apex bank recalibrated the Standing Facilities Corridor to +50/-300 basis points around the policy rate.
The decision to reduce the benchmark rate from 26.5 per cent to 23 per cent has attracted mixed reactions from economists and market participants, with several describing it as a welcome but unexpected move.
For investors, businesses and households, the immediate implications are likely to extend beyond borrowing costs. The lower-rate environment could reshape the attractiveness of naira assets, influence savings decisions, affect capital flows and provide some relief to government and corporate borrowers.
The extent to which those benefits outweigh the potential pressure on the naira and domestic savings, however, will depend on developments in inflation, foreign exchange liquidity, capital flows and the government’s fiscal position.