CBN Rate Cut: Rewane Warns Naira May Depreciate

The naira may come under depreciation pressure following the Central Bank of Nigeria’s (CBN) decision to cut its Monetary Policy Rate (MPR) by 350 basis points to 23 per cent, economist and Chief Executive Officer of Financial Derivatives Company (FDC), Bismarck Rewane, has said.

Rewane made the assessment while speaking on Channels Television’s Business Morning, following the CBN’s decision to reduce the benchmark rate from 26.5 per cent to 23 per cent.

He described the reduction as a significant cut, warning that lower interest rates could reduce the attractiveness of naira-denominated assets and affect investment flows.

According to Rewane, the reduction in interest rates could put pressure on the currency as returns on local assets decline. However, he said the naira may not weaken as significantly as some might expect.

Rewane estimated the naira’s fair value at about N1,150 to the US dollar, while noting that Nigeria’s real interest rate remains positive and could continue to support foreign investors engaged in carry trades.

He said the rate cut has reduced Nigeria’s real rate of return from about 11.1 per cent to 7.61 per cent.

The economist also warned that lower returns on savings could affect domestic savings and encourage some investors to move into alternative assets, including foreign currencies.

At the same time, Rewane said diaspora inflows could partly offset a potential decline in foreign portfolio investment, describing remittances as a possible substitute for some portfolio flows.

The immediate foreign-exchange market reaction to the rate cut has been relatively muted. Rewane noted that the naira traded around N1,387 to the dollar before briefly weakening to about N1,390 and subsequently returning to around N1,387 in the parallel market.

Beyond the currency market, Rewane said the lower interest-rate environment could provide relief for government borrowing costs and support corporate performance by reducing financing expenses.

He also argued that monetary easing needs to be accompanied by stronger fiscal consolidation, saying fiscal management and the reduction of leakages would remain important to sustaining price stability.

The CBN’s latest decision takes its easing cycle from 27.25 per cent in September 2024 to 23 per cent, while inflation has also declined substantially over the same period, according to Rewane.

For businesses and investors, the rate cut therefore presents a mixed outlook: potentially lower financing costs and support for equities on one hand, but reduced returns on naira assets and possible pressure on the currency on the other.