Inflation slowdown, naira rally strengthen investors’ confidence
The Monetary Policy Committee of the Central Bank of Nigeria has paused its hawkish stance for the first time in over two years, due to a decrease in the inflation rate and the strengthening of the local currency against major currencies, writes FELIX OLOYEDE
The Governor of the Central Bank of Nigeria, Olayemi Cardoso, made it clear since he assumed office that he would do everything to tame inflation in the country. He reiterated that in an interview with the Financial Times in May last year, saying, “They (MPC) will continue to do what has to be done to ensure that inflation comes down.”
Consequently, to combat the country’s high inflation, which soared for the fourth straight month, hitting a near 30-year high of 34.8 per cent in December 2024, the Monetary Policy Committee of the Central Bank of Nigeria hiked the monetary policy rate (interest rate) six times last year.
Meanwhile, following the rebasing of the country’s consumer price index, which measures the inflation rate, by the National Bureau of Statistics, inflation was said to stand at 24.48 per cent in January 2025.
Before then, inflation has been accelerating at a slower pace, rising 1.18 per cent (month-on-month) to 33.88 per cent in October, 0.72 per cent (month-on-month) to 34.60 per cent in November and 0.20 per cent (month-on-month) to 34.80 per cent in December 2024.
Besides inflation’s lower acceleration pace, the naira has also picked up steam, strengthening by 10.56 per cent from N1,660/$ on December 2, 2024, to N1,495.91/$ as of February 25 at the Nigerian Foreign Exchange Market.
Motivated by the positive trend, the Monetary Policy Committee of the CBN, which met for two days, between February 17 and 18, retained the MPR for the first time since May 2022.
The committee decided to keep the benchmark interest rate unchanged at 27.50 per cent and maintained the following parameters: the Cash Reserve Requirement for Deposit Money Banks at 50 per cent and for Merchant Banks at 16 per cent.
Additionally, it left the asymmetrical corridor around the MPR at +500bps/-100bps, and the liquidity ratio at 30 per cent.
According to Cardoso, the apex bank is now 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.
The CBN governor explained that following positive developments in the FX market, the apex focus on boosting liquidity and maintaining transparency in forex operations is sacrosanct.
“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 strengthened by 6.95 per cent to N1,510/$ in the parallel market on February 20, driven by exchange rate expectations, subdued forex demand, and sustained CBN intervention.
Businesses, especially real sector operators applauded the MPC decision to hold rates, so as to sustain naira rally and cut rising cost of borrowing.
These decisions were based on the fact that the Committee anticipates robust GDP growth in the medium term, driven by strong contributions from the non-oil sector. Additionally, the MPC noted the sustained rise in domestic crude oil production (1.74mb/d) and expects an improved contribution from the oil sector, further strengthening overall GDP growth.
The MPC acknowledged the rebasing of the CPI as well as the adjustments in the weights of items in the CPI basket, citing that the new methodology reflects current consumption patterns. Furthermore, the Committee expects inflationary pressures to moderate in the near future, helped by a relatively stable naira and gradual moderation in PMS prices.
The MPC highlighted the recent naira appreciation buoyed by improved FX liquidity and acknowledged the current measures by the CBN to foster transparency and credibility in the FX market, including the implementation of the Electronic Foreign Exchange System and the Nigerian Foreign Exchange Market FX Code.
The committee expected the sustained policy initiatives to improve Foreign Direct and Portfolio investments as investors’ confidence increases.
It also highlighted that the increased domestic crude oil production was expected to improve the current account balance and support FX reserve accretion.
On the global scale, the committee noted that while the Russia-Ukraine war and Middle Eastern conflicts remained downside risks to global GDP, potential resolutions could emerge following policy actions by the new US administration.
Additional risks include a possible global trade war driven by US tariff hikes, which may heighten inflationary pressures and weigh on global growth. However, the MPC highlighted that the IMF has maintained its global GDP growth forecast at 3.3 per cent for both 2025 and 2026.
Looking ahead, analysts at Cordros Securities expect future MPC decisions to be primarily influenced by developments in the FX market and the trajectory of inflation. “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.
The Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, said the global and domestic economic landscape was shifting, and Nigeria’s policymakers were navigating treacherous waters, adding, “Balancing risks remains delicate – tighten too much, and suffocate growth; ease too soon, and inflation spirals.”
“In its first meeting in 2025, held on February 19-20, the Monetary Policy Committee 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 drop in inflation rate, driven by the Consumer Price Index rebasing, meant that the MPC’s decision to hold rates was in line with expectations, even as further moderation in yields is possible.
Speaking on the MPC’s stance, the Head of Research at Cowry Asset Management Limited, Charles Abuede, noted that the committee was treading cautiously.
According to Abuede, market expectations leaned towards a 25-basis-point increase in the MPR to counter rising inflation, which has become entrenched in the economy.
“The committee should remain focused on maintaining price stability, especially as inflationary pressures persist despite previous rate hikes,” he noted.
He added that a lower inflation print had led the committee to prioritise economic growth over additional tightening, as other macroeconomic indicators suggest easing cost pressures.
The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, echoed similar sentiments, stating that the MPC is gradually easing its tight monetary policy stance.
He argued that while the central bank traditionally favoured restrictive measures, prevailing economic realities warranted holding rates steady.
Yusuf highlighted that the exchange rate had stabilised, and the monetary policy tightening instruments had been extensively utilised.
He said: “Monetary Policy Rate is 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, while the CBN continues to pursue the orthodox monitoring policy,” the economist asserted.
Analysts from the Nigeria Economic Summit Group also noted that easing inflation could influence future monetary policy.
They projected that by late 2025, the MPC might adopt a more accommodative stance, potentially lowering interest rates to stimulate economic activity, noting that this shift would signal a departure from the previous strict monetary policy aimed at controlling inflation.
The battle to tame inflation
CBN policies, including exchange rate unification, have significantly boosted foreign capital inflows while reducing the bank’s direct intervention in the forex market.
The floating of the naira and the clearance of a $7bn foreign exchange backlog improved Nigeria’s economic outlook, gaining positive recognition from international financial institutions like the World Bank.
Upon assuming office, CBN Governor Olayemi Cardoso prioritised strengthening Nigeria’s economic buffers. Inflation surged to 27 per cent due in part to rapid money supply growth, while GDP growth stagnated at 1.8 per cent over the past eight years. Money supply expanded at an annual average rate of 13 per cent, fuelling inflation and contributing to naira depreciation.
Cardoso highlighted that inflation erodes purchasing power and drives up living costs, acting as an implicit tax on households and businesses.
Nigeria also faced a fiscal crisis, with deficit financing through the CBN’s Ways and Means advances reaching N22.7tn by 2023—approximately 11 per cent of GDP.
Additionally, quasi-fiscal interventions exceeding N10tn undermined market confidence and weakened monetary policy effectiveness.
Under Cardoso’s leadership, renewed macroeconomic stabilisation efforts have bolstered investor confidence.
At the end of 2024, Nigeria capitalised on improved economic fundamentals to re-enter the Eurobond market after a two-year hiatus.
The November 2024 issuance attracted strong investor demand, with subscriptions exceeding $9bn.
The high-interest-rate environment has also drawn increased foreign portfolio investment inflows, reaching $3.48bn in the first half of 2024 compared to $756.1m in the same period of 2023.
The trend reflects growing confidence in Nigeria’s ability to manage its external debt obligations, providing a positive outlook for the country’s Eurobonds.
Looking ahead, Comercio Partners’ 2025 macroeconomic outlook emphasised that the rebasing of Nigeria’s CPI to 2024 could statistically lower inflation figures.
The Head of Investment Research and Global Macro Strategy, Comercio Partners, Ifeanyi Ubah, projected headline inflation to decline to around 15 per cent in the first half of 2025, signalling a gradual return to economic stability.
A key factor in sustaining this trend is the expansion of local refining capacity, particularly with the launch of the Dangote Refinery.
Increased domestic petroleum refining is expected to mitigate exchange rate volatility’s impact on energy prices.
By reducing dependence on imported fuel, Nigeria aims to stabilise energy costs, lower production and transportation expenses, and create broader economic benefits through a more predictable inflationary environment.
