CBN tight policy continues to slow credit growth as analysts warn of prolonged high borrowing costs and weak lending

The decisions of the Central Bank of Nigeria Monetary Policy Committee are continuing to reshape Nigeria’s financial markets, with analysts warning that prolonged high interest rates could further weaken credit growth and business expansion despite improving exchange rate stability.

Also read: CBN reassures banks amid recapitalisation delays

Investment analysts at Meristem Securities Limited said the apex bank’s decision to pause its aggressive monetary tightening cycle has effectively locked the economy into a prolonged “higher-for-longer” interest rate environment.

The Monetary Policy Rate remains at an elevated 26.50 per cent following the latest MPC meeting, a development analysts say will sustain restrictive financing conditions for businesses and households.

According to the report, the CBN tight policy stance is designed primarily to preserve naira stability and curb inflationary pressures linked to food prices and global commodity risks.

However, the analysts warned that many Nigerian businesses are increasingly unable to finance expansion projects or capital expenditure at current borrowing costs.

“The high cost of borrowing is expected to keep credit creation relatively weak, as both lenders and borrowers remain cautious amid still-tight financial conditions,” the analysts stated.

The report noted that the prolonged credit squeeze could weigh heavily on productivity and broader economic growth, as companies delay investments while households reduce discretionary borrowing.

Despite the pressure on the real sector, analysts believe the restrictive monetary posture may help ease imported inflation by supporting relative exchange rate stability.

“For businesses and households, financing conditions remain restrictive, limiting borrowing appetite and slowing expansion decisions, although exchange rate stability should continue to reduce some pressure from imported inflation,” the report added.

The high-rate environment is also reshaping banking sector earnings, with lenders increasingly relying on treasury-related income rather than broad-based loan expansion.

Analysts explained that elevated yields continue to support interest income from investment securities and repriced risk assets, even as credit growth remains sluggish.

The report highlighted a growing divergence within the banking sector, where strong returns from fixed-income instruments are offsetting weak lending activity.

“For banks, elevated rates should continue to support interest income, particularly from investment securities and repriced risk assets,” the analysts said.

The Governor of the Central Bank of Nigeria, Olayemi Cardoso, defended the policy direction during a post-MPC briefing in Abuja, insisting that exchange rate stability remains central to controlling inflation.

Cardoso acknowledged that inflation had risen slightly for two consecutive months but described the pressure as largely driven by temporary external shocks.

“It is key that the centrepiece of our toolkit is ensuring that our foreign exchange rate remains stable,” Cardoso said.

“Although inflation has risen marginally for two consecutive months, largely induced by external shocks, the MPC recognised its transitory nature and remained confident that the current macroeconomic environment is sufficiently robust to support a return to disinflation.”

Analysts also noted that softer demand for corporate loans is pushing more institutional liquidity into government securities, including Treasury Bills and bonds.

The report said persistent sovereign borrowing requirements and inflation concerns are likely to keep fixed-income yields attractive in the near term.

In the equities market, investors were advised to focus on resilient companies with strong earnings and stable dividend prospects capable of weathering the challenging operating environment.

Also read: CBN retains high interest rate in negative policy decision

Meristem analysts said the MPC is expected to maintain a cautious and disciplined posture until inflation slows more convincingly and exchange rate stability becomes firmly entrenched.