FX turnover falls 18% amid MPR cut to 23%, testing naira stability

Trading in Nigeria’s official foreign exchange market fell 17.7 per cent to $2.25 billion in the week ended September 25, even as the Central Bank of Nigeria (CBN) delivered its biggest rate cut in years and the naira held around N1,330 to the dollar.

The latest decline in foreign exchange turnover extends a two-week slowdown, with weekly activity falling from $3.16 billion in the week ended September 18 and $2.74 billion in the previous week.

Yet the naira remained relatively stable, trading within a narrow range of N1,325 to N1,336 per dollar during the week and closing at about N1,330. The stability came as Nigeria’s external reserves climbed above $55 billion, giving the CBN a stronger buffer against temporary foreign exchange shocks.

The changing market conditions are becoming more significant because the monetary authorities have now moved decisively towards lower interest rates.

At its September 21-22 meeting, the Monetary Policy Committee cut the Monetary Policy Rate by 350 basis points from 26.5 per cent to 23 per cent, while retaining the cash reserve ratio at 45 per cent for commercial banks and 16 per cent for merchant banks. The CBN also recalibrated its standing facilities corridor to +50/-300 basis points.

The rate cut could eventually reduce funding costs for businesses and households as banks adjust lending rates. That would provide relief to manufacturers, traders and other borrowers that have faced exceptionally high financing costs.

But cheaper naira money also changes the attractiveness of domestic assets to foreign investors.

With portfolio investors an increasingly important source of dollar liquidity, a sustained reduction in Nigerian interest rates could narrow the premium on naira-denominated assets relative to competing markets. That makes the strength and stability of other foreign exchange inflows increasingly important.

For now, Nigeria has a stronger external cushion than at the beginning of the year. The CBN has maintained that improved foreign exchange liquidity and reserve accumulation are helping to support the naira, while headline inflation eased to 15.39 per cent in August from 15.43 per cent in July.

The monthly decline in FX turnover, however, highlights another issue: market depth.

For manufacturers, importers and other businesses, a stable exchange rate is valuable only when dollars are consistently available to settle transactions. Lower turnover can therefore become a concern if it reflects reduced participation or weaker liquidity rather than simply a temporary decline in trading demand.

September’s cumulative NFEM turnover had reached about $13.58 billion by September 25, already exceeding the $12.54 billion recorded for the whole of August.

That suggests the market remains substantially active despite the latest weekly decline.

The CBN is therefore entering a delicate phase. Lower interest rates could stimulate credit, investment and economic activity, but the easing cycle must operate alongside policies that preserve confidence in the naira and keep foreign exchange liquidity sufficiently deep.

The immediate combination is encouraging: inflation is easing, reserves are rising, and the naira is broadly stable. But the real test will be whether cheaper money can revive private-sector credit without triggering renewed demand for dollars and reversing the gains made in the foreign exchange market.