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Following two consecutive decelerations in the country’s inflation rate and the relative stability in the foreign exchange market, hopes are high that the Monetary Policy Committee may review rates downward in its next meeting, writes FELIX OLOYEDE

Ahead of the 301st meeting of the Monetary Policy Committee, scheduled for 21-22 July in Abuja, the National Bureau of Statistics announced the inflation rate for June. It was a cheering one—yet another decline.

According to the NBS, headline inflation moderated to 22.22 per cent in June compared to 22.97 per cent in the previous month, making it the second consecutive drop in two months. The country’s inflation stood at 34.19 per cent in June 2024.

Meanwhile, the NBS rebased the Consumer Price Index earlier in the year, which saw inflation drop to 24.48 per cent in January from 34.80 per cent in December 2024.

The Monetary Policy Committee will be holding it’s 301st meeting on July 21-22 in Abuja. Stakeholders have expressed divergent views on the likely decisions of the MPC team. While some expressed confidence that in view of the current moderation in the inflation rate and exchange rate stability, a marginal reduction Monetary Policy Rate (MPR) could be the most likely outcome. For others, the MPC will retain its policy stance despite signs of disinflation and FX stability. Whichever where the pendulum swings, the MPC decision should sustain price and exchange rate stability as well as guarantee continuous FX inflows to the domestic economy.

The decline in the inflation rate and the stability in the country’s foreign exchange market have sparked optimism among analysts that the MPC might reconsider its hawkish monetary policy stance and slightly reduce rates this time.

The committee has retained rates twice this year and hiked them six times last year to rein in inflation.

At its May meeting, the MPC voted to maintain the benchmark interest rate at 27.50 per cent. This decision was rooted in cautious optimism, supported by signs of improving macroeconomic conditions. The committee highlighted several encouraging developments, including the narrowing gap between official and parallel exchange rates, declining Premium Motor Spirit prices, and a favourable trade balance—factors that collectively suggest a potential easing of inflationary pressures.

Committee members recognised the relative stability of the foreign exchange market and emphasised the need to continue monetary reforms to strengthen investor confidence.

At the May meeting, the MPC had cautioned that reinflationary pressures remained significant, justifying the retention of elevated interest rates to contain inflation risks. The Committee also warned that any premature rate cut could undermine the naira’s stability, particularly as recent forex gains were largely driven by high yields on Open Market Operation bills.

Looking ahead to the 301st meeting, analysts at Afrinvest Securities Limited expect the MPC to maintain its current policy stance, even in light of emerging signs of disinflation and a more stable foreign exchange environment.

They attribute their projection to ongoing external risks, food supply shocks resulting from recent insecurity and flooding, as well as uncertainties stemming from the delayed release of Nigeria’s rebased GDP figures for the first quarter of 2025.

Afrinvest West Africa had predicted that inflation could drop as low as 22.2 per cent by June 2025.

“Our view for the inflation projection is hinged on two major drivers. Firstly, the effect of the CBN’s strategic policy reforms has seen the naira strengthen in the month of June, up 3.6 per cent to close at N1,529.71. Secondly, the high base year effect from last year’s 34.2 per cent inflation reading is a contributing factor,” Afrinvest asserted.

However, the Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, advocated an interest rate slash by 25 basis points to 25 per cent.

In an emailed note to stakeholders, he stated that the easing of interest rates is supported by the latest forecast from the International Monetary Fund, which projects inflation will decline in the fourth quarter and further moderate to 18 per cent by 2026.

He outlined the broader implications of a lower Monetary Policy Rate, including reduced borrowing costs for small businesses and renewed momentum in the productive sector. Rewane’s Financial Derivatives Company also projected that inflation would drop to 22.65 per cent in June, down from 22.97 per cent

FDC attributed the reduction to a combination of factors, including a N100 reduction in PMS price, relative stability in the naira exchange rate, and a decline in money supply growth.

FDC expects food inflation to rise by 0.42 per cent to 21.56 per cent, up from 21.14 per cent. Core inflation is projected to decline by 1.34 per cent to 20.94 percent, down from 22.28 per cent.

“The inflation numbers could have been worse if not for the relative stability of the exchange rate,” FDC noted.

The firm stated that a further cut in ex-depot prices by Dangote Refinery could further reduce pump prices and potentially ease inflation.

Analysts at Cordros Securities projected that with the commencement of the second half of the year, there would be a need to continue to adopt a cautiously optimistic stance.

“The Gross Domestic Product growth is expected to remain robust as economic strains induced by the reforms continue to ease. With domestic inflation expected to continue easing, the Monetary Policy Committee may begin to consider a gradual pivot toward monetary easing,” they explained.

Analysts indicated that the relatively tight global financial environment, along with uncertainties arising from global trade tensions and geopolitical instability, was likely to limit the extent of interest rate cuts. T

According to the CBN Governor, Olayemi Cardoso, the apex bank is now more than ever consolidating market gains and ensuring sustained improvement is crucial.

“We will enhance collaboration with the fiscal sector by increasing the depth and regularity of our interactions to drive economic growth. With stabilising forex rates, strengthened price controls, and rising investor confidence, the economy shows strong signs of resilience and recovery,” he said.

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Cardoso stated that, following positive developments in the foreign exchange market, the Central Bank of Nigeria’s focus on enhancing liquidity and ensuring transparency in foreign exchange operations is essential.

“Our Objectives have been and will continue to be to achieve stability in the Foreign Exchange and the Financial markets. CBN will continue to embrace orthodoxy and stay the course. We remain vigilant and will not take anything for granted. Inflation has been too high for too long, and our goal is to bring it down from double digits to single digits in the medium to long term,” he said.

The naira has strengthened by 7.27 per cent this year to $/1,530 at the alternative forex market on Thursday from $/1,650 in January, underpinned by exchange rate expectations, subdued forex demand, and sustained CBN intervention.

Businesses, particularly those in the real sector, welcomed the MPC’s decision to maintain interest rates to support the naira’s rally and reduce the rising cost of borrowing.

The committee’s decisions were anchored on expectations of robust medium-term GDP growth, largely driven by strong performance in the non-oil sector. It also cited the sustained rise in domestic crude oil production—currently at 1.74 million barrels per day—as a key factor likely to boost the oil sector’s contribution to overall economic output.

The MPC acknowledged the recent rebasing of the Consumer Price Index and the revised weightings of basket components, noting that the updated methodology better reflects prevailing consumption patterns. It projected that inflationary pressures would ease in the near term, supported by a relatively stable naira and the continued moderation in PMS prices.

The committee also pointed to the recent appreciation of the naira, driven by improved foreign exchange liquidity. It commended ongoing central bank initiatives aimed at enhancing transparency and market confidence, including the rollout of the Electronic Foreign Exchange System and the Nigerian Foreign Exchange Market FX Code.

The committee expects the sustained policy initiatives to improve Foreign Direct and Portfolio investments as investors’ confidence increases. The MPC also highlighted that the increased domestic crude oil production is expected to improve the current account balance and support forex reserve accretion.

The committee observed that geopolitical tensions—particularly the Russia-Ukraine war and ongoing conflicts in the Middle East—continue to pose downside risks to global GDP. Nevertheless, potential resolutions may arise as the new U.S. administration implements policy interventions. Further risks include a looming global trade war, triggered by U.S. tariff increases, which could amplify inflationary pressures and dampen global economic growth.

Despite these concerns, the MPC noted that the IMF had retained its global growth projection at 3.3 per cent for both 2025 and 2026.

Looking ahead, analysts at Cordros Securities expect future MPC decisions to be shaped largely by exchange rate dynamics and inflation trends.

“While a potential rate cut could be considered at the May policy meeting, we anticipate a gradual approach aimed at balancing exchange rate stability with the anticipated disinflationary process,” they said in emailed notes to investors.

Analysts said that before the MPC meeting, market participants had already begun repricing yields downward despite the tight liquidity conditions in the financial system.

Rewane stated that the global and domestic economic landscape is changing, and Nigeria’s policymakers are navigating challenging conditions. Balancing risks is delicate; if they tighten too much, it may stifle growth, while easing too soon could lead to soaring inflation.

“In its first meeting in 2025, held on February 19-20, the MPC finally hit the pause button on interest rate hikes after 12 months of an aggressive tightening campaign. The restrictive stance saw the policy rate peak at 27.5 per cent per annum, pushing maximum lending rates above 30 per cent per annum. Markets perceive this move as the beginning of a more accommodating stance as the yield curve inverted, especially at the short end following the rate decision,” he said.

The Research Head of Cowry Asset Management Limited, Charles Abuede, stated that the MPC was proceeding with caution regarding its decisions. “The committee should remain focused on maintaining price stability, especially as inflationary pressures persist despite previous rate hikes.”

Abuede noted that a softer inflation print is encouraging the MPC to shift focus toward supporting economic growth rather than pursuing further monetary tightening, especially as other macroeconomic indicators point to easing cost pressures.

He observed that the MPC appears to be gradually easing out of its aggressive tightening cycle.

Despite the central bank’s traditionally hawkish stance, Abuede argued that prevailing economic realities justify holding interest rates steady.

Other analysts echoed that sentiment, pointing to relative exchange rate stability and warning that the economy may already be experiencing the limits of monetary tightening, given what they described as an “overdose” of policy tools such as elevated interest rates and stringent reserve requirements.

“Monetary Policy Rate were already at around 27.5 per cent and the Cash Reserve Requirement is already at 50 per cent, which are practically the limits that monetary policy can be pushed for now.

“Interest rate now for many businesses is over 35 per cent, and it should not get worse than that. “We need to tackle food inflation, which is a major factor in our current inflation. So, we need to do a lot more in the area of development finance, why the CBN continues to pursue the orthodox monitoring policy,” he argued.

Analysts from the Nigerian Economic Summit Group have indicated that a reduction in inflation could impact monetary policy.

They expect that the MPC might take a more accommodative approach by late 2025, possibly lowering interest rates to encourage economic activity. This change would represent a significant shift from the earlier tight monetary policy that was focused on controlling inflation.

As the MPC prepares to meet in Abuja, it stands at a critical policy juncture—caught between encouraging signs of disinflation and the lingering risks of external shocks and domestic vulnerabilities. With inflation slowing, the naira gaining ground, and investor confidence gradually returning, the case for a modest rate cut appears stronger than ever.

Felix Oloyede