NESG: FG’s single-digit inflation target puts lending rates in spotlight

The Nigerian government wants inflation below 10 percent before the end of 2027, but the cost of borrowing is moving in the opposite direction.

Despite the Central Bank of Nigeria’s (CBN) reduction of its benchmark interest rate to 23 percent in September, the banking sector’s average maximum lending rate rose to 32.62 percent in September from 29.20 percent in August, underscoring how slowly monetary easing can reach businesses.

Taiwo Oyedele, minister of finance and coordinating minister of the economy, announced the government’s target on Monday at the 32nd Nigerian Economic Summit in Abuja, arguing that cheaper credit could unlock investment and accelerate growth.

“If you are growing at 4.43 percent and borrowing at close to 30 percent, imagine what is possible when you borrow at single-digit rates,” he said.

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The ambition is clear, but the route is less certain. Headline inflation fell to 14.63 percent in September from 15.39 percent in August, while food inflation remained at 19.59 percent.

To reach 9.9 percent, headline inflation must fall by another 4.73 percentage points from September’s level. That requires sustained disinflation in an economy where food, energy and transport costs remain significant pressures.

Falling inflation, expensive money

Lower inflation can create room for interest rate cuts, but it does not compel banks to reduce lending rates by the same amount.

Banks price loans according to their funding costs, borrowers’ creditworthiness, operating expenses and the returns available from alternative investments. High yields on government securities can also make lending to private businesses less attractive.

The recent lending-rate figures illustrate the problem. The CBN reduced its monetary policy rate to 23 percent in September, yet the average maximum lending rate rose in the same month.

The average prime lending rate also increased, from 17.86 percent in August to 19.04 percent in September.

The IMF has described this kind of uneven transmission as a “rockets-and-feathers” pattern: lending rates rise quickly when monetary policy tightens but tend to fall much more slowly when policy eases.

The result is that businesses may continue to face high borrowing costs even after inflation begins to moderate.

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Food prices and the exchange-rate risk

The inflation target also depends on factors that interest rates cannot resolve on their own. Better harvests, improved security in farming areas and lower distribution costs could help moderate food prices.

Exchange-rate stability could reduce the naira cost of imported goods and production inputs, while reliable electricity would lower operating costs for manufacturers and other businesses.

Faruq Quadri, an economist at SPEC-Matrix, has warned against treating a decline in inflation as a recovery in household purchasing power. “The significant decline in inflation is a positive development, but it is important to distinguish between the rate of price increase and the level of prices,” Quadri said in earlier comments.

He argued that incomes must consistently grow faster than inflation for households to recover purchasing power.

That distinction matters for the government’s target. If inflation falls below 10 percent, prices would still be rising, only more slowly. Households would continue to face the higher price base created by previous inflation unless wages and other incomes caught up.

Energy costs pose another risk. Olugbenga Olaoye, an energy economist and member of the US Association for Energy Economics, has highlighted the tension between Nigeria’s crude-oil exports and its dependence on imported refined products.

“The country exports crude but still imports fuel, so rising prices increase both revenues and costs at the same time,” Olaoye said.

His observation points to a vulnerability for the disinflation effort. Higher oil prices can improve export earnings and government revenue, but they can also raise domestic fuel and transport costs, feeding into food prices and the cost of moving goods.

The net effect depends on oil production, refining, exchange-rate movements and how quickly higher energy costs pass through the economy.

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What cheaper loans would change

The potential gains from lower borrowing costs are substantial. On a hypothetical N100 million loan over one year, simple interest at 30 percent would amount to N30 million.

At 10 percent, it would be N10 million, before fees and other charges. That difference could influence whether a manufacturer expands production, a distributor increases inventory, or a smaller business postpones investment.

However, affordable credit must be accompanied by opportunities to invest productively. Firms need dependable power, efficient transport, access to inputs and sufficient demand.

Without those conditions, lower interest rates may not translate into a commensurate increase in output or employment. If credit expands demand faster than domestic supply, it could also put renewed pressure on prices.

The government’s target therefore requires coordination between fiscal policy, monetary management and reforms that expand productive capacity. Fiscal discipline matters because heavy government borrowing can sustain high market yields and compete with private businesses for funds.

Supply-side improvements are equally important because they can ease price pressures without relying entirely on weaker demand.

Oyedele has set out the desired destination, but the public announcement did not provide a detailed sequence of measures or milestones for reaching it. The government will need to show how it intends to sustain the fall in inflation while creating the conditions for lending rates to decline.

Nigeria’s September figures offer a clear warning against assuming that one rate automatically follows the other. Inflation can fall while commercial borrowing costs remain high.

For the target to deliver its promised benefits, lower inflation must be accompanied by cheaper bank credit, stronger investment and rising productive output.