LAGOS, NIGERIA — Bismarck Rewane, the Chief Executive Officer of Financial Derivatives Company, has said the naira may depreciate following the Central Bank of Nigeria’s decision to cut its benchmark interest rate to 23 percent, but added that the currency may not weaken as much as feared.
Rewane spoke on Wednesday during Channels Television’s “Business Morning” programme, where he analysed the implications of the CBN’s Monetary Policy Committee decision to reduce the Monetary Policy Rate by 50 basis points from 23.5 percent to 23 percent. He said the rate cut was expected to reduce the attractiveness of naira-denominated assets, potentially putting pressure on the local currency.
“When you cut interest rates, you reduce the incentive for foreign investors to hold naira assets. This can lead to capital outflows and put pressure on the exchange rate. So, yes, the naira may depreciate as a result of this decision,” Rewane stated.
However, the renowned economist said the depreciation may be limited because the naira is currently trading close to its fair value, and because Nigeria’s real interest rate remains positive. He explained that with inflation at around 15.43 percent and the MPR at 23 percent, the real interest rate — the difference between the nominal rate and inflation — is positive, which provides some support for the currency.
“The naira may not weaken as much as feared because it is already trading close to its fair value. Also, Nigeria’s real interest rate is still positive, which means that investors can still earn a real return on naira assets. This should provide some cushion for the currency,” he said.
Rewane noted that the CBN’s decision to cut rates was driven by the need to support economic growth, as inflation has continued to moderate and economic activity remains subdued. He said the apex bank was balancing the need to control inflation with the need to stimulate lending and investment.
“The CBN is walking a tightrope. On one hand, it wants to support growth by reducing interest rates. On the other hand, it wants to keep inflation under control and maintain exchange rate stability. The decision to cut rates by 50 basis points is a measured approach that reflects this balancing act,” he said.
The FDC boss said the naira’s performance in the coming weeks would depend on several factors, including the level of foreign exchange inflows, the CBN’s intervention in the market, and global economic conditions. He advised the CBN to maintain a tight monetary policy stance to anchor inflation expectations and to support the currency.
“The CBN should continue to monitor the situation closely and to adjust its policies as needed. It is important to maintain a tight monetary policy stance to anchor inflation expectations and to support the exchange rate,” he said.
Rewane also expressed concern about the impact of the rate cut on the cost of borrowing, noting that it could lead to increased lending and investment, which could in turn stimulate economic growth. He, however, warned that the benefits of lower interest rates would only materialise if the banking sector was willing to lend to the real sector.
“The rate cut is a positive signal, but its impact will depend on whether the banks are willing to lend to businesses and households. We need to see a significant increase in credit to the private sector for the rate cut to have a meaningful impact on the economy,” he said.
The CBN’s decision to cut the MPR was announced on Tuesday by the Governor, Olayemi Cardoso, following the conclusion of the MPC meeting in Abuja. The committee said the decision was informed by the need to support economic growth and to ensure that the economy remains on a path of sustainable recovery.
As the naira continues to react to the rate cut, analysts will be watching closely to see whether the currency remains stable or whether it depreciates further. For now, Rewane’s assessment suggests that while the naira may weaken, the depreciation is likely to be moderate, given the positive real interest rate and the currency’s fair valuation.
