Interest rate is the cost of money and one of the major macroeconomic variables which determine the dynamics, direction and health of an economy.
Other major macroeconomic variables are, exchange rate, inflation rate, unemployment rate, imports and exports and consumer confidence.
Central banks determine the interest rates for their respective economies towards attaining their set objectives.
An increase in interest rate points to a contractionary monetary policy which aims to control inflationary pressure.
But an excessive increase in interest rate can throw an economy into a recession with business cycle contraction general slowdown of economic activities when output falls, unemployment rises and government tend to borrow more.
A reduction in interest rate points to an expansionary monetary policy which aims to stimulate economic growth, but an abnormal low interest rate can trigger inflation and destabilise the financial system.
Very low interest rate contributed to the 2008 subprime mortgage financial crisis in America and which led to the global financial meltdown( 2007- 2009) that disrupted markets and economies across the world.
After the 2001 dot.com bubble, Allan Greenspan, the then US Fed Chairman( 1987- 2006) lowered interest rate to 1.0 percent which flooded the economy with cheap money and loans were advanced to people with poor credit and a high risk of default.
Other causes of the meltdown included credit default swaps which were designed for hedging against mortgage defaults and complex financial products which were sold to investors across the world and which spread the risks throughout the global financial system.
Central banks need to determine appropriate interest rates towards ensuring financial system stability and maintenance of healthy economies.
A healthy economy is a growing, stable and sustainable economy which offers inclusive and equitable opportunities and prosperity and with a dynamic job market and which supports the well-being of its citizens.
Experts have noted that a healthy economic growth rate should be between 2.0 to 3.0 percent and that a GDP growth above 4.0 percent for several quarters would overheat the economy and create asset bubble.
An unhealthy economy disrupts the well-being of its citizens and is marked by fast rising inflation which erodes purchasing power, high unemployment rate, decline in GDP, imbalance in imports and exports, stagnant wages, reduction in consumer spending, excessive government debt or regulation that stifles market activity.
The Central Bank of Nigeria( CBN) has been adjusting the interest rate towards ensuring a healthy economy.
After due environmental scanning and evaluation of both the local and global economies, the Monetary Policy Committee( MPC) of the Bank, at its recent 304th meeting on February 23 and 24, 2026, reduced the Monetary Policy Rate( MPR) by 50 basis points to 26.50 percent.
It 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 per cent for merchant banks and 75 per cent for non TSA public sector deposit.
The Monetary Policy Rate( MPR) is the benchmark interest rate, the Asymmetric corridor establishes a ceiling lending rate to banks and a floor deposit rate from banks and the Cash Reserve Ratio( CRR) determines the percentage of customers deposits which banks should sterilise in the central bank.
The objective of CBN’s reduction of the MPR by 50 basis points to 26.50 percent is to stimulate growth but it is a very cautious reduction because, though inflation has dropped, it is still relatively high.
And that is why the CRR was set at 45 percent which means that for every deposits banks make at CBN, 45% will be sterilised and which restricts banks capacity to provide loans and the impact is to control inflation and stabilise the naira.
Inflation and exchange rate volatility have been two major problems of the economy which were aggravated by the fuel subsidy removal and floating of the exchange rate.
In response, CBN evolved policy combinations to stabilise the exchange rate and launched an aggressive fight against inflation by increasing the MPR consistently over time.
In February 2024, CBN raised the MPR from 18.75 percent to 22.75 percent. In March it was raised to 24.75 percent and later to 26.25 percent and up to 27.50 percent.
Also in February 2024, the CRR was raised from 32.0 percent to 45.0 percent. In September 2024, it was further raised to 50 percent.
In September 2025 it was reversed to 45 percent because of a five- month decline in inflation, and most recently in February 23 and 24, 2026, the CRR was retained at 45 percent.
Managing interest rate and other monetary policy tools which are components of the monetary transmission mechanism involves technicalities and dexterity towards attaining the target objectives.
CBN’s policy actions have contributed to the stabilisation of the economy and aiming for consolidation.
In its 2026 macroeconomic outlook, CBN is “cautiously optimistic” and projected a more stable and resilient economy with lower inflation and growth prospects.
Nwobu, a Chartered Stockbroker and Business Journalist wrote via arizenwobu@yahoo.com Tel 08033021230.
