Nigeria: MPC faces tough balancing act of sustaining price, exchange rate stability

Zawya

21-07-2025

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) faces a tough balancing act: sustain the naira's recent stability, and control inflation while ensuring that borrowing costs do not continue to suffocate businesses and economic growth.
The stage is set for what could be one of the most crucial monetary policy meetings of the year, as the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) convenes its 301st session on July 21–22 in Abuja. Coming at a time of relative macroeconomic stability, the meeting is expected to determine whether Nigeria maintains its current tight monetary policy stance or begins to ease interest rates in response to emerging disinflationary signals.
Why this meeting matters
The MPC's decisions over the past 12 months have shaped Nigeria's economic direction, with aggressive rate hikes introduced to combat runaway inflation and restore investor confidence. At the last meeting in May, the Committee opted to retain the Monetary Policy Rate (MPR) at 27.5 percent, a decision that signaled cautious optimism amid improving fundamentals.
Recent data have supported this cautious approach. Inflation is showing signs of moderation, falling to 22.22 percent in June 2025. The exchange rate has stabilized, with the naira appreciating by 3.6 percent in June to close at N1,529.71/$. Foreign exchange (FX) inflows have improved, bolstered by high yields on Nigerian Open Market Operation (OMO) bills and reforms in the FX market.
However, the economy is not out of the woods yet. Food inflation remains high due to insecurity and flooding, while global financial conditions and geopolitical uncertainties continue to pose risks.
The Case for holding rates
For many analysts, the case for keeping rates unchanged remains strong. Afrinvest Securities Limited expects the MPC to maintain its current stance, citing three key reasons: External Risks: Geopolitical instability in Eastern Europe and the Middle East could disrupt global trade and commodity prices.
Domestic Food Supply Shocks: Insecurity and flooding have tightened food supply chains, posing risks to inflation despite the recent naira gains. Economic Data Uncertainty: The delayed release of Nigeria's rebased GDP figures for Q1 2025 adds uncertainty to policy formulation.
Afrinvest projects inflation to ease further, but it warns that a premature rate cut could derail the naira's recent gains. The Committee has previously emphasized that high yields on Nigerian OMO bills are crucial for attracting foreign portfolio inflows, which in turn support FX stability.
Similarly, Cordros Securities advocates a cautious approach. In a note to investors, it stated: 'While domestic inflation is expected to continue easing and GDP growth remains robust, a sudden pivot to monetary easing could undermine FX market stability. A gradual approach is preferable as the MPC balances the disinflationary process with exchange rate stability.'
Arguments for a rate cut
Despite the strong case for maintaining rates, calls for easing are growing louder. Bismarck Rewane, Managing Director of Financial Derivatives Company (FDC) Limited, is leading that charge. He recommends a 25 basis-point cut to 25 percent, arguing that the economy can no longer bear the burden of excessively high borrowing costs.
In an emailed note to stakeholders, Rewane said: 'Interest rates above 30 percent are unsustainable for small businesses and manufacturers. The IMF's forecast that Nigeria's inflation will drop to 18 percent in 2026 provides further justification for a gradual shift toward monetary easing.'
FDC had projected that headline inflation rate would fall to 22.65 percent in June, citing lower PMS prices, a stable naira, and slowing money supply growth. It eased below the forecast. However, it expected food inflation to tick up slightly to 21.56 percent due to supply chain disruptions.
The wider implications of a rate cut, according to FDC, include reduced borrowing costs for small and medium-sized enterprises (SMEs); increased credit availability for the productive sector, and improved consumer demand, which could stimulate growth. FDC further argues that Dangote Refinery's recent decision to cut ex-depot PMS prices could exert additional downward pressure on pump prices, easing inflation further in coming months.
Cardoso's caution and CBN's strategy
CBN Governor Olayemi Cardoso has, however, consistently signaled caution. Speaking after the 300th MPC meeting in May, he underscored the need to consolidate recent gains rather than risk a premature policy reversal. 'We will continue to enhance collaboration with the fiscal sector to drive growth. Stabilising forex rates, controlling inflation, and boosting investor confidence remain our priorities,' Cardoso said.
He reiterated that the apex bank's goals include reducing inflation from double digits to single digits over the medium term, maintaining transparency in FX operations through reforms such as the Electronic Foreign Exchange System (EFEMS) and the Nigerian Foreign Exchange Market (NFEM) FX Code.
Sustaining FX liquidity to support exchange rate stability
Recent data supports his cautious optimism. The naira gained 6.95 percent in the parallel market to trade at N1,510/$ as of February 20, driven by improved FX liquidity, subdued demand, and consistent CBN interventions. Businesses, especially in the real sector, have applauded the MPC's decision to hold rates, viewing it as supportive of the naira's rally and a restraint on further borrowing cost increases.
Macroeconomic fundamentals improving
Nigeria's macroeconomic indicators are showing steady improvement, giving the MPC some room to consider future policy easing. GDP Growth: The Committee anticipates robust GDP growth in the medium term, driven by strong non-oil sector performance and increased crude oil production, which stood at 1.74 million barrels per day recently. Trade Balance: A favourable trade balance has eased pressure on FX demand.
Inflation Outlook: The rebasing of the Consumer Price Index (CPI) and adjustments to consumption basket weights are expected to reflect more realistic consumption patterns, with inflationary pressures projected to moderate further.
Investor Confidence: Transparency in FX operations and the clearing of over $7 billion FX backlog have improved Nigeria's credibility among foreign investors and multilateral organisations.
Stakeholders call for policy mix
While monetary tightening has been effective in stabilising the exchange rate, some stakeholders argue that Nigeria has reached the limits of what monetary policy alone can achieve. Charles Abuede, Research Head at Cowry Asset Management Limited, said the MPC must now focus on balancing price stability with growth. 'With MPR already at 27.5 per cent and Cash Reserve Requirement (CRR) at 50 percent, monetary policy has been stretched to its limits. We need complementary fiscal and development finance interventions, especially in tackling food inflation,' Abuede said.
The Nigeria Economic Summit Group (NESG) agrees, predicting that the MPC could adopt a more accommodative stance later in the year. 'As inflation continues to ease, a gradual reduction in interest rates would stimulate economic activity, particularly in the productive sector,' NESG noted.
Global context: Risks and opportunities
Globally, the MPC must also weigh risks such as:
Geopolitical Tensions. The Russia-Ukraine conflict and Middle Eastern tensions continue to disrupt global trade flows. Tight Global Financial Conditions: Higher interest rates in advanced economies make it challenging for emerging markets like Nigeria to attract portfolio inflows if local yields fall too fast. Trade Policy Uncertainty: The possibility of a global trade war, driven by US tariff hikes, could raise global inflation and dampen growth.
However, there are also opportunities. The International Monetary Fund (IMF) has maintained a global GDP growth forecast of 3.3 percent for 2025 and 2026, suggesting that global demand may remain relatively stable.
Outlook: What to expect from the 301st meeting
Given the mixed signals, most analysts expect the MPC to hold rates at 27.5 percent in July, maintaining its cautious stance until inflation moderates further. However, discussions around a gradual easing in the second half of 2025 are likely to gain traction if inflation continues to trend downward.
The MPC's decisions will likely hinge on three key factors: the trajectory of inflation in Q3 2025, sustainability of the naira's recent stability, global financial market trends and portfolio inflows.
In the words of Rewane:
'Balancing risks remains delicate – tighten too much, and you stifle growth; ease too soon, and inflation spirals. The MPC must tread carefully.'
While there is increasing optimism over easing inflation, the MPC faces a delicate balancing act: cut rates too soon, and it risks undoing recent gains in exchange rate stability; keep rates too high, and economic growth could be stifled.
Whatever the outcome of next week's meeting, one thing is clear—policymakers must carefully navigate the twin goals of sustaining price and exchange rate stability while gradually reviving domestic productivity and investor confidence.
For now, stakeholders can only wait as the CBN charts its next steps in navigating Nigeria's economic recovery.
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