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As Nigeria records a second consecutive decline in inflation and gains greater stability in the foreign exchange market, expectations are mounting that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria may ease its tight monetary stance at its 301st meeting, scheduled for July 21–22, 2025, in Abuja.
The June inflation data released by the National Bureau of Statistics (NBS) showed headline inflation easing to 22.22%, down from 22.97% in May, reinforcing optimism of a potential policy shift. This marked the second straight monthly decline and follows a CPI rebasing exercise earlier this year, which revised January inflation to 24.48% from December 2024’s 34.80%.
Policy at a Crossroads
Market watchers and economists remain divided on the likely direction of the MPC’s decision. While some believe the latest inflation trend and exchange rate stability support a marginal reduction in the Monetary Policy Rate (MPR), others argue that the Committee may maintain the current rate of 27.50% to avoid undermining recent gains.
The MPC had adopted a more cautious stance at its last meeting in May, holding rates steady after a year of aggressive tightening—six hikes in 2024 alone—designed to tame surging inflation and stabilize the naira.
At the time, the Committee cited key indicators such as narrowing FX market arbitrage, lower PMS prices, and a favourable trade position as signals of improving macroeconomic fundamentals.
Yet it warned against premature easing, noting that residual inflationary pressures and reliance on high-yield instruments to attract foreign capital made the case for policy restraint. Yields on Open Market Operation (OMO) bills remained a critical magnet for FX inflows.
Analysts Split Ahead of July Decision
Afrinvest Securities expects the MPC to hold rates steady at this meeting, citing persistent external vulnerabilities, food supply disruptions due to insecurity and flooding, and the delayed release of rebased GDP data for Q1 2025.
“We project inflation to drop to 22.2% by June, driven by a stronger naira—which appreciated 3.6% to N1,529.71—and a favourable base-year effect from last year’s 34.2% headline inflation,” the firm noted.
In contrast, Bismarck Rewane, Managing Director of Financial Derivatives Company (FDC), advocated a 25 basis point cut, arguing that interest rate easing is now viable, especially with the IMF projecting inflation to moderate to 18% by 2026.
FDC estimates June inflation at 22.65%, attributing the fall to a N100 drop in PMS prices, naira stability, and a deceleration in money supply growth. However, it projects food inflation to rise to 21.56%, while core inflation is expected to decline to 20.94%.
Building the Case for Easing
Cordros Securities analysts believe Nigeria’s economy is entering a phase where modest monetary easing could be on the horizon. They cite robust GDP growth projections, easing inflationary pressures, and sustained FX market improvements as rationale for a cautiously accommodative stance.
Still, they acknowledge global risks—tight financial conditions, geopolitical uncertainties, and trade tensions—that may constrain the MPC’s room to maneuver.
CBN Governor Olayemi Cardoso reinforced the central bank’s resolve to consolidate recent macroeconomic gains. “We remain focused on enhancing FX liquidity, transparency, and price stability,” he said. “Our objective remains to bring inflation down from double digits to single digits in the medium term.”
Cardoso stressed continued collaboration with fiscal authorities, rising investor confidence, and improved oil output—now at 1.74 million barrels per day—as key indicators of recovery.
Rate Cut or Caution?
The naira has appreciated by 7.27% year-to-date, strengthening from N1,650/$ in January to N1,530/$ in the parallel market, supported by reduced FX demand, sustained CBN interventions, and improved FX governance—such as the rollout of the Electronic FX System and adoption of the FX Market Code.
Businesses, particularly in the real sector, have backed recent MPC decisions to keep rates unchanged, noting the need to support the naira and ease borrowing costs.
However, critics argue that Nigeria may have reached the limits of monetary tightening. With the Cash Reserve Ratio (CRR) at 50% and MPR at 27.5%, lending rates have surpassed 35% for many borrowers, threatening productivity and capital access.
Economist Charles Abuede, Head of Research at Cowry Asset Management, believes the MPC is shifting focus toward growth. “A softer inflation print offers the MPC space to support economic expansion without jeopardizing price stability,” he noted.
Abuede added that further tightening may yield diminishing returns, and a gradual pivot away from aggressive tightening appears underway.
Outlook: A Delicate Balancing Act
The Nigerian Economic Summit Group anticipates a more accommodative monetary stance by the end of 2025 if disinflation persists and FX stability holds.
Despite lingering global headwinds—including the Russia-Ukraine conflict, Middle East instability, and trade risks from U.S. tariffs—the IMF has maintained its global growth forecast at 3.3% for 2025 and 2026, lending some support to Nigeria’s external outlook.
Ultimately, the MPC must strike a fine balance—avoid premature easing that could weaken the naira or trigger inflation, while also recognizing the need to unlock financing for growth and investment.
As policymakers converge in Abuja, all eyes will be on whether the Committee signals the start of a gradual policy pivot or continues to tread carefully on its tightening path. Either way, the direction it chooses will shape the trajectory of Nigeria’s economy in the months ahead.
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