Nigeria’s interest rate pause sparks mixed reactions across market

For the first time in about three years, Nigeria’s Monetary Policy Committee (MPC) decided to pause its aggressive interest rate hikes, following a rejig of inflation data and moderation in prices after raising its key benchmark rates from 11.5 percent in May 2022 to 27.5 percent in November last year.

But this decision to hold rates steady after its 299th meeting last Thursday raises critical questions about its impact on inflation that averaged 32 percent in 2024; investments flowing in on a high interest rate environment; and overall market stability.

“In terms of implications, the pause in rate hikes is expected to result in lower yields in the fixed-income market, driven by market expectations of possible rate cuts in the upcoming MPC meeting,” analysts at Lagos-based FBNQuest Merchant bank research said in a note on Friday.

Post-MPC decision, the secondary market was predominantly bullish, with the average yields of treasury bills and bonds declining to 20.21 percent and 19.79 percent, respectively, from pre-meeting yields of 21.96 percent and 19.92 percent.

Equity markets could benefit in the short term, as lower borrowing costs encourage businesses to expand. Banking stocks, in particular, may see increased activity as loan growth improves with stable interest rates. However, foreign investors might remain cautious, as Nigeria’s real interest rate—adjusted for inflation—remains a key determinant of capital inflows.

“Despite the notable activity in the short-to-mid end of the curve, we expect a gradual flattening as investors shift towards long-duration instruments to hedge against potential rate cuts and yield reductions. We anticipate a mild reaction in the stock market. However, lower market yields may likely lead to the reallocation of funds into equities on the back of promising performance in key sectors,” the research analysts said.

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Impact on borrowing and business growth

For businesses and consumers, the pause in rate hikes offers some relief. The cost of borrowing has risen significantly over the past year to above 30 percent, constraining access to credit for small and medium-sized enterprises (SMEs). If the CBN maintains this stance, businesses may find it easier to finance expansion plans, potentially boosting job creation and economic output.

However, if inflation remains high, real interest rates could remain negative, discouraging long-term investments. The central bank will need to balance supporting economic growth with ensuring price stability.

Exchange rate and foreign investment considerations

Nigeria’s foreign exchange market has been under pressure due to fluctuating dollar inflows and exchange rate volatility. A pause in rate hikes could slow the appreciation of the naira, especially if global investors perceive a reduced return on naira-denominated assets.

Foreign portfolio investors, who often seek high yields in emerging markets, may reassess their exposure to Nigeria. If inflation does not ease significantly, the attractiveness of Nigerian bonds could decline, leading to potential capital outflows.

However, a stable interest rate environment could also encourage long-term foreign direct investment (FDI), as businesses prefer predictable monetary policies.

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Banks to continue benefiting from high MPR

Since the current governor Olayemi Cardoso of CBN assumed office, he maintained a hawkish stance which saw rates increased for six straight times in 2024 to tame inflation and lure in capital flows. Despite holding rates steady, analysts believe that banks will still continue to gain from the high monetary policy rate.

“Given that lending rates are closely linked to the MPR, we expect banks to continue to benefit from the elevated interest rate environment in the near term,” FBNQuest analysts said.

What next – easing or holding still?

The CBN’s decision suggests a wait-and-see approach, monitoring inflation and economic data before making further moves. If inflation trends downward, the MPC could consider rate cuts in the coming months, supporting economic growth. However, if price pressures persist, a return to tightening may be necessary.

For now, businesses and investors will closely watch inflation reports, foreign exchange trends, and signals from the CBN on future policy direction. The market’s response will depend on whether this pause is the beginning of an easing cycle or merely a temporary hold in Nigeria’s battle against inflation.