Central Banks: Beyond the Politics of Rates

TAIWO Oyedele, the tax expert who is now in charge of the Nigerian economy, held a meeting with Yemi Cardoso, the country’s central bank governor. Both men promised to work together for an effective coordination of monetary and fiscal policies. They shook hands and signed a memorandum of understanding.

Less than two weeks later, the Central Bank of Nigeria (CBN) announced a 3.5% cut in the Monetary Policy Rate, the benchmark for interest rates, in the Nigerian financial system.

Central banks and fiscal authorities are supposed to be independent of each other. But general elections usually bring them together. Despite the theoretical independence of Central Banks’ leadership, their bosses cannot pretend not to owe their appointments (or at least nomination) to the grace of the president.

The market responded with a thud. Banks’ deposits with the CBH hit a 7-month high of N7.3 trillion ($5.4 billion), according to BusinessDay newspaper. Average yield on 3-month paper spiked over 100 basis points between September 2025 and 2024, although the yield remained below the 19.2% it was in 2024. The All-Share index of the Nigerian Exchange Group rose by from 250,614.66 to 252,113.41 between September 22 when the rate cut was announced and the following Friday.

Interest rate setting is a monetary policy affair, but its effects vibrate beyond the financial market and the economy, into politics. In the United States, President Donald Trump it has been no love lost between President Donald Trump and the Chairman of Federal Reserve Bank, Jerome Powell, since he returned to power and during his first time despite the fact that Mr. Trump appointed Mr. Powell. Mr. Trump wanted a lower rate to stimulate the economy. President Trump has a company in fellow Republican predecessor, Richard Nixon, and another strongman, Recep Tayyip Erdogan, the strongman of Turkey, among others, who have had bitter spats with leaders of their central banks on rates.

A 350% cut in MPR is supposed to stimulate the economy but how stimulating will it be? Manufacturers will cite high cost of finance as a major business killer in Nigeria with a 120-day lending rate of almost 30%, depending on volume and relationship. The discount rate on a typical 270-day commercial paper in the debt capital market can be high as 26%.

These rates are expected to come down as the effect of the MPR cut permeates the financial market. However, Nigerian banks are usually known to be smarter than their regulators, especially when it comes to circumventing monetary policies. The problem is not just rates but the willingness to lend, said Segun Aina, managing director of Ryan global, a Lagos manufacturing firm. “Rather than create risk assets for lower returns, banks may keep the put money in safer instruments. Election cycle usually comes with high political risk sensitivity in Nigeria. Irrespective of interest rates, banks just usually feel it is not the time to be aggressive until the storm is over.

The lending conundrum has always been the headache of almost every CBN governor since the creation of modern financial system especially with high-risk profiles. Mr Cardoso’s predecessor, Godwin Emefiele, had to design a special instrument called Lending-Deposit Ratio (LDR), and set the threshold at 65% (percentage of bank’s deposit that should be given out as deposits) to force banks to lend.

Some industry watchers believe that moving other indicators along the same line with the MPR would have helped. The CBN kept Cash Reserves Requirement (CRR) at 45% and Liquidity Ratio at 30%. Banks’ lending to the private sector by August 2026 was N84 trillion, about the same amount kept with the CBN through its various instruments.

Even Mr Cardoso acknowledged the problem when he advised the banks to “put the capital to work”, referring to the over N4.5 trillion raised by Nigerian banks following a recapitalization mandate given by the CBN over two years ago. Even the beneficiary of this capital wave, President Bola Tinubu, whose government had been the beneficiary of the capital the banks has been deploying (through purchase of government instruments) is also towing the same line. Speaking at the 2026 Conference of the Chartered Institute of Bankers of Nigeria (CIBN), the main platform for industry practitioners, Mr. Tinubu advised banks not to treat the funds raised as a balance sheet item but an economic stimulating measure.

Rate cut is a good step in the effort to unlock the much-needed capital for the growth of production in Nigeria. But it may not be enough. It may be time to look at another instrument, LDR-style, to get the capital work.