Market News

BY  Tony Chukwunyem

Easing inflation and exchange rate stability are fuelling hopes that the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) might cut the Monetary Policy Rate (MPR) at its meeting next month, writes Tony Chukwunyem

Citing the need to tackle inflation and ensure exchange rate stability, the Central Bank of Nigeria (CBN) has, since May 2022, when it embarked on its current monetary tightening cycle, resisted calls from the country’s Organised Private Sector (OPS) to reduce its benchmark interest rate-the Monetary Policy Rate (MPR).

In fact, the apex bank has steadily raised the rate from 11.5 per cent in 2022, including six hikes in 2024 alone, to its present level of 27.5 per cent.

However, following the National Bureau of Statistics’ (NBS) rebasing of the Consumer Price Index (CPI) at the beginning of this year, which resulted in the country’s headline inflation rate falling sharply from 34.80 per cent in December 2024 to 24.48 per cent in January 2025, many analysts had predicted that the deceleration in inflation will persist and lead to the CBN easing its tight monetary stance.

Indeed, the inflation rate fell further to 23.18 per cent in February and while it rose slightly to 24.23 per cent in March, it resumed its downward trend in April, falling to 23.71 per cent.

MPC May meeting

Still, members of the apex bank’s Monetary Policy Committee (MPC), at their meeting in May, voted for the second time in a row to leave the MPR and other key policy parameters unchanged.

Speaking at the post MPC meeting press conference, CBN Governor, Mr. Olayemi Cardoso, said the committee’s decision to maintain the rate was unanimous and driven by recent positive macroeconomic indicators.

According to the CBN Governor, the MPC noted the relative improvements in some key macroeconomic indicators which are expected to support the overall moderation in prices in the near to medium term.

These improvements include the progressive narrowing of the gap between the Nigeria foreign exchange market and Bureaux De Change (BDC) window, the positive balance of payments position and the drop in the price of PMS.

He stated: “The MPC noted the relative improvements in some key macroeconomic indicators which are expected to support the overall moderation in prices in the near to medium term.

“Members also noted with satisfaction the progressive moderation in food inflation, and therefore commended the government for implementing measures to increase food supply as well as stepping up the ight against insecurity, especially in farming communities.

“The MPC thus encouraged security agencies to sustain the momentum while the government provides necessary inputs to farmers to further boost food production.”

“The MPC noted new policies introduced by the Federal Government to boost local production, reduce foreign currency demand pressures, and thus lessen the pass through to domestic prices,” he added.

Rate cut

Although the MPC’s next meeting is coming up in about a month’s time, analysts at Financial Derivatives Company (FDC) are already predicting that the slowdown in inflation and exchange rate stability suggest that the Committee “will likely cut the policy rate by 50bps to stimulate growth.”

Specifically, the analysts predicted that the inflation rate likely fell to 23.2 per cent in May, would ease to 23.15 per cent in June and moderate further to about 20 percent in December.

The FDC analysts, who said that the recent downward trend in the inflation rate has been, “supported by exchange rate stability and easing logistic costs,” also projected that “the naira is likely to trade between N1,600–N1,650/$, reflecting improved FX market stability.”

Significantly, in the latest edition of its Nigeria Development Update (NDU) report, which was released on May 12, about a week before the MPC held its May meeting, , the World Bank said: “Gauging inflation dynamics in early 2025 is difficult, given the consumer price index rebasing, but price pressures remain high.

The last Monetary Policy Committee of the CBN, in February 2025, appropriately kept the monetary policy stance unchanged to help combat price increases.

Inflation is expected to fall to an annual average of 22.1 per cent in 2025, as a sustained tight stance firmly establishes monetary credibility and dampens inflationary expectations.”

Commending the country’s monetary authority, the report said: “Inflation has remained high and sticky, and the CBN has kept monetary policy appropriately tight in response. Entrenched inflationary expectations after a prolonged pe

Maintaining the current rate is crucial not only to continue tempering inflation but also to preserve the attractiveness of Nigeria’s fixed income market

riod of high inflation and inflation inertia (CPI) rebasing are apparent.

Gauging inflation dynamics in early 2025 is difficult, given the consumer price index rebasing, but price pressures remain high.

The last Monetary Policy Committee of the CBN, in February 2025, appropriately kept the monetary policy stance unchanged to help combat price increases.

Inflation is expected to fall to an annual average of 22.1 percent in 2025, as a sustained tight stance firmly establishes monetary credibility and dampens inflationary expectations.”

Market transparency

It further said: “Recent reforms have also helped to consolidate the foreign exchange market under a market-reflective, stabler naira, as well as to strengthen Nigeria’s external position.

FX market transparency was helped by the adoption in December 2024 of a new trading system in the official market, advancing the recent policy overhaul. Nigeria’s external position has strengthened, as the higher exchange rate compressed imports and boosted foreign portfolio investment.

“The current account surplus surged by 185 percent to $17.2 billion in 2024 (9.2 percent of GDP), and the surplus is expected to be maintained in the medium term, depending on the future course of global oil prices.

Gross official reserves fell from their recent peak of $40.9 billion in December 2024, to $37.9 billion at end-April 2025, partly due to the CBN exiting legacy FX liability positions.

Yet, reserves remain significantly higher than the recent low in May 2024 of $32.5 billion. Importantly, the disclosure of the long-awaited net external reserves position, at $23.1 billion in end-2024, up from $4 billion a year earlier, should boost confidence in Nigeria’s external liquidity.”

Growth

While the CBN would have been encouraged by the World Bank’s positive comments about its anti-inflation measures and forex reforms and may thus want to sustain them, another reason for the speculation that the MPC may cut interest rates at its meeting next month is the growing concern over the negative impact of its prolonged tight monetary policy stance on the economy.

For instance, commenting on the Committee’s decision to leave rates unchanged at the May meeting, analysts at Cowry Asset Management Limited highlighted the negative impact that a tight credit environment could have on broader economic activity in the near to medium term.

While noting the decision, “reflects caution in the face of persistent external and internal uncertainties,” the analysts stated: “Concerns persist around the elevated cost of borrowing, which continues to constrain access to credit for both businesses and households.

This tight credit environment poses downside risks to private sectorled investment and could weigh on broader economic activity or output growth in the near to medium term.”

They further said: “Looking ahead, the path of inflation remains a critical variable. If cost pressures—driven by FX instability, potential increases in pump prices for petroleum motor spirit (PMS), and other structural inefficiencies—fail to subside, Nigeria could see inflation climb once more.

“This would erode real interest rates and could undermine monetary stability if the current nominal rates are not adjusted in time. The balance between sustaining growth and containing inflation remains delicate, and the CBN’s future actions will need to reflect evolving macroeconomic dynamics.”

Investor confidence

However, in a report they released in reaction to the Consumer Price Index (CPI) data for April released by the National Bureau of Statistics (NBS), analysts at Comercio Partners, said: “Given the easing of headline inflation but persistence of structural pressures particularly around food supply and currency risk, the MPC is likely to hold the policy rate at its May 2025 meeting.

This stance supports disinflation while preserving investor confidence and helping attract portfolio flows. “Maintaining the current rate is crucial not only to continue tempering inflation but also to preserve the attractiveness of Nigeria’s fixed income market, especially Foreign Portfolio Investments (FPIs).

Although they noted that a positive real interest rate (inflation is still below the MPR) offers some policy flexibility, the analysts warned that, “a rate cut remains risky in the current environment.”

As they put it: “A modest rate cut could support credit growth in manufacturing and agriculture and reduce government debt costs.

However, with rising external risks and fragile investor sentiment, premature easing could trigger capital flight, FX pressure and renewed inflation, undermining recent stability gains.”

Conclusion

Certainly, despite falling inflation and exchange rate stability with geo-political tensions continuing to shape the global economy, it might be a bit hasty for anyone to begin to predict in June that members of the MPC will vote to cut interest rates at their meeting slated for July 21 and July 22.