Examining the Central Bank's Impact on Borrowing Costs and Monetary Trends

The cost of borrowing, also known as the interest rate, plays a significant role in shaping the overall health and trajectory of an economy, alongside other key macroeconomic variables such as exchange rate, inflation rate, unemployment rate, imports and exports, and consumer confidence.

Central banks, responsible for setting interest rates, aim to achieve specific objectives, with an increase in interest rate typically indicating a contractionary monetary policy designed to curb inflationary pressures.

However, an excessive increase in interest rates can have far-reaching consequences, potentially plunging an economy into recession, characterized by a contraction in business cycles, a slowdown in economic activities, rising unemployment, and increased government borrowing.

On the other hand, a reduction in interest rates signals an expansionary monetary policy, intended to stimulate economic growth, although abnormally low interest rates can trigger inflation and destabilize the financial system.

The 2008 subprime mortgage financial crisis in the United States, which led to a global financial meltdown from 2007 to 2009, was partly caused by very low interest rates, as exemplified by the actions of Allan Greenspan, the then US Fed Chairman, who lowered interest rates to 1.0 percent after the 2001 dot-com bubble.

This decision flooded the economy with cheap money, leading to loans being advanced to individuals with poor credit and a high risk of default, while other contributing factors included credit default swaps and complex financial products that spread risks throughout the global financial system.

To maintain financial system stability and ensure healthy economies, central banks must determine appropriate interest rates, with a healthy economy characterized by growth, stability, and sustainability, offering inclusive and equitable opportunities and prosperity, as well as a dynamic job market that supports the well-being of its citizens.

Experts suggest that a healthy economic growth rate should fall between 2.0 and 3.0 percent, with a GDP growth above 4.0 percent for several quarters likely to overheat the economy and create asset bubbles.

An unhealthy economy, on the other hand, is marked by fast-rising inflation, high unemployment rates, declining GDP, imbalances in imports and exports, stagnant wages, reduced consumer spending, excessive government debt, or regulation that stifles market activity.

The Central Bank of Nigeria (CBN) has been adjusting interest rates to ensure a healthy economy, and after evaluating both local and global economies, the Monetary Policy Committee (MPC) reduced the Monetary Policy Rate (MPR) by 50 basis points to 26.50 percent at its 304th meeting on February 23 and 24, 2026.

The CBN retained the Asymmetric corridor at +50 to – 450 basis points and set the Cash Reserve Ratio (CRR) at 45 percent for deposit money banks, 16 percent for merchant banks, and 75 percent for non-TSA public sector deposits, with the MPR serving as the benchmark interest rate.

The Asymmetric corridor establishes a ceiling lending rate to banks and a floor deposit rate from banks, while the CRR determines the percentage of customer deposits that banks should sterilize in the Central Bank.

The objective of the CBN's reduction of the MPR by 50 basis points to 26.50 percent is to stimulate growth, although it is a cautious reduction, given that inflation has dropped but remains relatively high, prompting the CBN to set the CRR at 45 percent to control inflation and stabilize the naira.

Inflation and exchange rate volatility have been significant problems for the economy, exacerbated by fuel subsidy removal and the floating of the exchange rate, prompting the CBN to develop policy combinations to stabilize the exchange rate and launch an aggressive fight against inflation.

The CBN has consistently raised the MPR over time, from 18.75 percent to 22.75 percent in February 2024, then to 24.75 percent in March, 26.25 percent, and up to 27.50 percent, while also adjusting the CRR from 32.0 percent to 45.0 percent in February 2024, and further to 50 percent in September 2024.

In September 2025, the CRR was reversed to 45 percent due to a five-month decline in inflation, and most recently, in February 2026, the CRR was retained at 45 percent.

Managing interest rates and other monetary policy tools requires technical expertise and dexterity to achieve target objectives, with the CBN's policy actions contributing to the stabilization of the economy and aiming for consolidation.

In its 2026 macroeconomic outlook, the CBN is "cautiously optimistic" and projects a more stable and resilient economy with lower inflation and growth prospects.