Naira, price stability and MPC’s new policy direction

Exchange rate and price stability are key considerations for halting the three-year-long monetary tightening. But in this report, COLLINS OLAYINKA and HELEN OJI consider how the recent decision will smoothen out the entrenched pricing crisis in the near to medium-term.

In May 2022, the MPR moved to 13 per cent up from 11.5 per cent. By the end of 2023, the monetary policy rate (MPR) stood at 18 per cent following adjustments. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) reports that inflationary pressures are moderating as the naira continues its upward trajectory.

The decision to retain all parameters was influenced by a positive inflation outlook, the naira’s appreciation, and the steady decline in petrol prices. The efforts of the CBN in curbing inflationary pressures, supported by the stable naira, which has benefited from improved foreign exchange (FX) liquidity have drawn positive reviews from experts.

Since assuming office on the 23rd of September 2023, Cardoso has not hidden his intention to fight inflation through rate tightening. So, it is not surprising that rates have consistently been adjusted to match inflation.

Indeed, fighting inflation in an import-dependent economy like Nigeria is a complex task. Taking this into consideration, the MPC considered key parameters which guided its decision to maintain unchanged rates at its 299th meeting in Abuja including the need to control inflation and sustain exchange rate stability.

As a result, the Committee voted to keep the MPR constant at 27.5 per cent and retain all other parameters. The parameters include the cash reserve requirement (CRR) for deposit money banks (DMBs) and merchant banks at 50 per cent and 16 per cent, respectively. The asymmetric corridor around the MPR at +500 basis points/-100 basis points and the liquidity ratio at 30 per cent.

In January, Nigeria’s annual inflation rate stood at 24.48 per cent, significantly lower than the previous month’s figure due to the rebasing of Nigeria’s consumer price index (CPI) for the first time in over a decade.

Speaking on the MPC’s decision, CBN Governor, Olayemi Cardoso, emphasized the importance of consolidating market gains and ensuring sustained improvement. For him, attaining market stability and sustaining the steadfastness of the exchange environment are paramount.

For sustainability, he stressed the need for enhanced collaboration with the fiscal authorities by increasing the depth and regularity of interactions to drive economic growth.

No doubt, it has shown that with stabilising forex rates, strengthened price controls, and rising investor confidence, the economy has been exhibiting promising signs of resilience and recovery.

Again, Cardoso underscored that following positive developments in the FX market, the CBN’s commitment to boosting liquidity and maintaining transparency in FX operations remains unwavering.

“Our objectives have been and will remain to achieve stability in the foreign exchange and financial markets. The Central Bank of Nigeria (CBN) will continue to uphold orthodoxy and remain steadfast in its approach. We remain vigilant and will not take anything for granted. Inflation has been persistently high for an extended period, and our objective is to bring it down from double digits to single digits in the medium to long term,” he said.

On February 20, 2025, the naira appreciated by 6.95 per cent to N1,510/$ in the parallel market, driven by expectations of exchange rate stability, reduced forex demand and sustained CBN intervention.

This has elated the business community, particularly the real sector. Understandably, the business community will always welcome lower interest rates as that will ensure cheap borrowing which will increase industry capacity and boost consumer spending.

The MPC’s decision to halt the rate increment was based on several factors. First, the Committee anticipates robust GDP growth in the medium term, driven by significant contributions from the non-oil sector. Secondly, the MPC noted the sustained increase in domestic crude oil production which hovers around 1.74 million barrels per day and expects an improved performance from the oil sector, which will further bolster overall GDP growth.

The MPC also acknowledged the rebasing of the CPI and the adjustments made to the weights of items in the CPI basket. Cardoso insisted that the new methodology aligns with current consumption patterns and reflects the evolving economic landscape. Also, he said the Committee remains optimistic that inflationary pressures will likely ease shortly, based its optimism on a relatively stable naira and gradual reductions in prices of PMS. The MPC also underscored that the surge in domestic crude oil production is projected to enhance the current account balance and contribute to FX reserve accretion.

The Committee also recognised the current measures taken by the CBN to enhance transparency and credibility in the foreign exchange market, including the implementation of the Electronic Foreign Exchange System (EFEMS) and the Nigerian Foreign Exchange Market (NFEM) FX Code.

The Committee anticipates that sustained policy initiatives will foster increased investor confidence, leading to improved foreign direct and portfolio investments.

On the global scale, the Committee acknowledged that while the Russia-Ukraine war and Middle Eastern conflicts pose downside risks to global GDP, potential resolutions may emerge through policy actions taken by the new US administration.

It noted that there are concerns about a potential global trade war triggered by US tariff hikes, which could exacerbate inflationary pressures and hinder global growth. However, the MPC emphasized that the IMF has maintained its global GDP growth forecast of 3.3 per cent for both 2025 and 2026.

In the coming months, analysts at Cordros Securities anticipate that future MPC decisions will be primarily influenced by developments in the FX market and the trajectory of inflation. While a potential rate cut may be considered at the May policy meeting as inflation continues its downward trend, they expect a gradual approach aimed at achieving exchange rate stability while accommodating the anticipated disinflationary process.

Before the MPC meeting, market participants had already begun adjusting yields downward despite the challenging liquidity conditions in the financial system.
The Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, emphasized that the global and domestic economic landscapes are undergoing significant shifts, and Nigeria’s policymakers are navigating complex and uncertain waters.

He stressed that striking a delicate balance remains a critical challenge – tightening monetary policy too aggressively could stifle growth while easing it too soon could lead to spiralling inflation.

Following sustained rate hikes, the restrictive stance culminated in a peak policy rate of 27.5 per cent per annum, pushing maximum lending rates above 30 per cent yearly. Markets interpret this move as a shift towards a more accommodating stance, particularly evident in the inverted yield curve, especially at the short end, following the rate decision.

The decline in the inflation rate, driven by the Consumer Price Index rebasing, aligns with expectations, even though further moderation in yields is possible.

Speaking on the MPC’s decisions, Charles Abuede, Research Head at Cowry Asset Management Limited, emphasized the committee’s cautious approach. He submitted that market expectations anticipated a 25-basis point increase in the Monetary Policy Rate (MPR) to align with market expectations, driven by the urgent need to curb rising inflation, which has become deeply ingrained in the economy.

Abuede underscored the importance of maintaining price stability, particularly as inflationary pressures persist despite previous rate hikes.
He suggested that a lower inflation print prompts the MPC to prioritize economic growth over further tightening, given the encouraging signs from other macroeconomic indicators indicating easing cost pressures.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, also commented on the MPC’s gradual relaxation of monetary policy tightening.He acknowledged the central bank’s well-known disposition but emphasized the necessity of holding rates in the current circumstances.

Yusuf acknowledged the stability in the exchange rate, considering the already substantial accumulation of monetary policy tightening instruments. He stated that the Monetary Policy Rate (MPR) was already at around 27.5 per cent and the Cash Reserve Requirement (CRR) was at 50 per cent, which are practically the limits monetary policy can reach now.

Interest rates for many businesses are already over 35 per cent and should not increase further. He emphasized the need to address food inflation, which is a significant factor contributing to the current inflation.He urged the CBN to invest more in development finance but criticized the CBN’s continued pursuit of an orthodox monitoring policy.

Analysts from the Nigeria Economic Summit Group also predicted that easing inflation would influence monetary policy.They suggested that the CBN’s Monetary MPC may adopt a more accommodative stance in late 2025, potentially lowering interest rates to stimulate economic activity.

This shift would represent a departure from the previous tight monetary policy regime aimed at controlling inflation.The CBN’s policies, including the exchange rate unification, have led to substantial foreign capital inflows into the economy while reducing its intervention in the forex market.

The floatation of the naira and the clearing of over $7 billion FX backlog have improved the country’s outlook for foreign investors and multilateral organizations like the World Bank, which described it as a bold intervention to enhance the economy’s long-term sustainability.

Cardoso revealed that upon assuming office, his leadership prioritized rebuilding Nigeria’s economic buffers and strengthening resilience.
Before he took office, inflation had surged to 27 per cent, partly due to excessive money supply growth. While GDP growth had stagnated at a meagre 1.8 per cent over the previous eight years, the money supply had expanded rapidly, averaging approximately 13 per cent annual growth.

This imbalance not only fueled inflation but also significantly depreciated the naira. The Central Bank explained that inflation creates uncertainty for households and businesses, acting as a silent tax by eroding purchasing power and driving up living costs.

The nation was also grappling with a fiscal crisis, marked by unsustainable deficit financing through the Central Bank’s Ways and Means advances, which had reached an unprecedented N22.7 trillion by 2023—equivalent to almost 11 per cent of the GDP. In addition, quasi-fiscal interventions by the CBN, totalling over N10 trillion, undermined market confidence and weakened the effectiveness of its policy tools.

Amidst these challenges, the Central Bank under Cardoso has brought new hope in managing the financial system and economy. The current macroeconomic stabilisation efforts support Nigeria’s ability to attract foreign investors to its markets.

For instance, at the end of 2024, Nigeria leveraged its improved economic fundamentals to re-enter the Eurobond market, seeking to address its fiscal deficit. This move marked the country’s return to the international debt market in November after a two-year absence. In a dual-tranche Eurobond issuance, investor demand surged, with subscriptions exceeding $9 billion.

The high-interest rate environment also attracted higher foreign portfolio investment inflows, totalling $3.48 billion in the first half of 2024 compared to $756.1 million during the same period in 2023. This trend reflects growing investor confidence in Nigeria’s ability to manage its external debt burden, a positive signal for Nigeria’s Eurobonds.

Comercio Partners, in its 2025 macroeconomic outlook, anticipated that the rebasing of Nigeria’s Consumer Price Index (CPI) to 2024 would also have statistical effects that could lower inflation figures.

The Director and CEO of the Centre for the Promotion of Private Enterprises (CPPE), Muda Yusuf, welcomed the decision, describing it as a necessary step to prevent further financial strain on businesses and individuals.

Yusuf noted that, following the recent rebasing of inflation calculations, Nigeria’s inflation rate is now lower than the MPR. In this context, he argued that holding the rate steady helps to avoid exacerbating financial pressure on businesses and individuals with bank exposures.

Looking ahead, Yusuf anticipated a gradual relaxation of monetary tightening in subsequent MPC meetings. He argued that keeping the MPR above inflation for an extended period could excessively constrain investors and economic activities. Hence, he expected the CBN to consider easing the MPR and CRR shortly.He also pointed to emerging signs of price moderation in key sectors, citing declines in the cost of diesel, petrol, some food items and pharmaceutical products.

If exchange rate stability is sustained, he believes, further price reductions could follow in the coming months. Yusuf expressed optimism about the inflation outlook, expecting the CBN to adjust its policies to reflect the improving economic landscape in the coming months.

According to Ifeanyi Ubah, head of investment research and global macro strategist, the report predicts a gradual return to economic stability with headline inflation expected to decrease to around 15 per cent in the first half of 2025.

The report underscored the importance of increasing local refining capacity, especially with the commencement of the Dangote Refinery, and a possible reduction in energy price volatility.

Chude Nwude, a banking and finance professor at the University of Nigeria, supported the MPC’s decision to maintain the current rate, noting that it would ensure a positive interest rate environment, which could attract domestic and foreign investment, boost capital formation and strengthen the naira.