Economists warn CBN as MPC retains 27.5% interest rate

Economists have warned that the monetary and fiscal policy authorities in Nigeria must collaborate to avoid a fresh rise in inflation following the retention of the country’s benchmark interest rate at 27.50 per cent by the Monetary Policy Committee of the Central Bank of Nigeria on Thursday.

CBN’s MPC retained the rate at the committee’s 299th meeting in Abuja.

CBN Governor, Olayemi Cardoso, announced the decision during a press briefing on Thursday, stating that all parameters were unanimously held as the committee assessed the economic outlook for 2025.

“The committee was unanimous in its decision to hold all parameters and thus decided as follows: 1. Retain the MPR at 27.50 per cent. 2. Retain the asymmetric corridor around the MPR at +500/-100 basis points.

“3. Retain the Cash Reserve Ratio of Deposit Money Banks at 50.00 per cent and Merchant Banks at 16 per cent. 4. Retain the Liquidity Ratio at 30.00 per cent,” Cardoso said.

The decision marks a pause in rate hikes after six consecutive increases in 2024, as the apex bank navigates inflationary pressures, exchange rate volatility, and economic growth concerns.

The committee noted stability in the foreign exchange market, improvements in external reserves, and a gradual moderation in fuel prices as key macroeconomic developments influencing its decision

It acknowledged that inflation remains a concern, particularly as the recent rebasing of the Consumer Price Index by the National Bureau of Statistics revised headline inflation to 24.48 per cent in January 2025, compared to 34.80 per cent in December 2024 under the previous base year.

The MPC expressed confidence that as food security measures improve, inflationary pressures, particularly those driven by food prices, will ease over time.

Cardoso further highlighted the need for continued collaboration between monetary and fiscal authorities to sustain recent macroeconomic gains.

He stated that the CBN’s recent measures in the foreign exchange market, such as the Electronic Foreign Exchange Matching System and the Nigeria Foreign Exchange Code, have helped stabilise the exchange rate.

The committee observed a convergence between the Nigeria Foreign Exchange Market and Bureau de Change rates, improving market transparency and liquidity.

The committee noted a positive trend in oil production, which reached 1.54 million barrels per day in January 2025, as a key factor supporting external reserves, which stood at $39.4bn as of February 14, 2025, translating to an import cover of 9.6 months.

It also noted that Nigeria’s GDP grew by 3.46 per cent in the third quarter of 2024, driven primarily by the non-oil sector, with the services industry playing a dominant role.

Cardoso reassured that the banking sector remains robust and resilient despite ongoing macroeconomic challenges. However, he stressed the importance of strengthening banking system surveillance, particularly in light of the ongoing recapitalisation drive for deposit money banks.

He stated that the CBN would ensure the injection of quality capital into the banking system to safeguard financial stability amid both domestic and global uncertainties.

The committee identified geopolitical risks, including the Russia-Ukraine conflict and tensions in the Middle East, as factors that could influence Nigeria’s economic stability.

It also expressed concerns over the United States government’s increased tariffs on trade partners, which could impact global inflation and economic growth. The MPC reaffirmed its commitment to monitoring domestic and global economic developments, with the next policy meeting scheduled for May 19 and 20, 2025.

The decision to retain the monetary parameters comes after the National Bureau of Statistics recently disclosed that Nigeria’s headline inflation rate stood at 24.48 per cent in January 2025.

This figure, however, reflects a recalculated Consumer Price Index following the rebasing of inflation metrics. Under the previous methodology, the inflation rate was reported at 34.80 per cent in December 2024.

With inflation appearing to have moderated under the rebased CPI, there were calls from economic analysts and business groups to pause further rate increases.

Economists speak

he Centre for the Promotion of Private Enterprise urged the CBN to halt further monetary tightening, arguing that fiscal policy interventions should now take precedence in addressing inflationary pressures.

The Chief Executive Officer of CPPE, Dr Muda Yusuf, stressed that increasing interest rates further could stifle economic growth at a time when businesses need access to affordable credit.

“My expectation from the MPC meeting is to maintain a hold, however, my preference is to begin relaxing some of the tightening measures due to the excessively high interest rates.

“I do not anticipate further hikes in the Monetary Policy Rate or the Cash Reserve Ratio. I believe it is time to halt these hikes and allow fiscal policy measures to tackle inflation,” Yusuf stated.

He further noted that some of the metrics used in arriving at the interest rates ought to have been adjusted, stressing that the rates should not be raised further by the apex bank.

On his part, a financial analyst and Group Chief Executive Officer of Cowry Assets Management, Johnson Chukwu, stated that with inflation at 24.48 per cent, the decision signals a shift in policy, reducing the likelihood of further rate hikes in the immediate term.

“In terms of inflation, the decision to hold was based on the fact that the interest rate environment is now positive. Bear in mind that the Monetary Policy Rate is 27.5 per cent and inflation is 24.48 per cent. At this point, we can say that Nigeria has a positive interest rate. What that means is that we should not expect further increases in interest rates,” Johnson said.

He explained that investors are still enjoying positive returns, making additional rate hikes unnecessary.

“The discount rate on Treasury Bills was 21.8 per cent, yielding effectively. This means that as long as investors get positive returns, we should expect that further increases in rates will not necessarily happen in the immediate,” he noted.

Johnson also highlighted the impact of the CBN’s policies on commercial banks, stating that “the percentage of 50 per cent deposit is still sterilised, which means the banks are not encouraged to increase their lending. The CBN does not have to cover the banks to create additional loans.”

He emphasized the importance of aligning monetary and fiscal policies to ensure economic stability.

“The key thing we must know is that every policy has positive and negative effects. What that means is that the monetary authorities must come up with policies that do not counterbalance the fiscal authorities. The fiscal authorities have adopted aggressive fiscal policies and want to stimulate the economy, and what the monetary authorities must do is ensure they do not neutralize these fiscal policies.”

He further warned that excessive monetary stimulus could have negative consequences.

“Any monetary policy that significantly increases the stimulation of the economy beyond what the fiscal authorities have done will lead to forex exchange pressure and inflationary pressure. To avoid that, at this point, they made the best decision.”

Johnson concluded by stressing the need for collaboration between monetary and fiscal policymakers. “The monetary and fiscal authorities must go hand in hand,” he said.