MPC: Naira Sustains Rally As Inflationary Pressures Moderate

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) last week halted its policy rate tightening cycle at the first meeting of the year, marking the first pause since May 2022 Analysts applauded CBN’s role in the drop in inflationary pressures supported by a stable naira buoyed by improved forex liquidity. Our man, Bamidele Ogunwusi writes;

There is no doubt that fighting inflation in an import-dependent economy like Nigeria is never a simple task.

That explained why the need to tame inflation and sustain exchange rate stability formed part of the key parameters that determined Monetary Policy Committee (MPC) decision to keep rates unchanged at its 299th meeting held recently in Abuja.

Accordingly, the Committee voted to hold the MPR constant at 27.50 per cent and retain all other parameters – Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks at 50 per cent and 16 per cent, respectively; the asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30 per cent.

Nigeria’s annual inflation rate stood at 24.48 per cent in January, the National Bureau of Statistics (NBS) said. The figure is well down from the previous month’s figure after the Nigeria’s Consumer Price Index (CPI) was rebased for the first time in more than a decade.

CBN Governor Olayemi Cardoso said the apex bank is now more than ever, 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.

Cardoso explained that ⁠following positive developments in the FX market, the CBN’s 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. The Committee also 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 (EFEMS) and the Nigerian Foreign Exchange Market (NFEM) FX Code.

The Committee expects the sustained policy initiatives to improve Foreign Direct and Portfolio investments as investors’ confidence increases. The MPC also highlighted that the increased domestic crude oil production is 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 remain 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, Financial Derivatives Company Limited, Bismarck Rewane, said global and domestic economic landscape is shifting, and Nigeria’s policymakers are navigating treacherous waters. 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 (MPC) 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 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 decisions, the Research Head, Cowry Asset Management Limited, Charles Abuede, said the MPC is treading cautiously. He said the market expectation was for the MPC to increase MPR by

25 basis points to align with market expectations, driven by the need to curb 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.

Abuede said a lower inflation print is prompting the MPC to prioritise economic growth over further tightening, particularly as other macroeconomic indicators suggest easing cost pressures.
Also speaking, Chief Executive Officer, Centre for the Promotion of Private Enterprise, Muda Yusuf, said the MPC is gradually relaxing of the tightening of the monetary policy.

He said despite the well known disposition of the central bank, the reality of the moment required that rates be held.

Yusuf agreed that there has been some stability in the exchange rate, having regard to the fact that there is already what can regarded as an overdose of monetary policy tightening instruments.

He said: “Monetary Policy Rate (MPR) were already at around 27.5 per cent and the Cash Reserve Requirement (CRR) 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, why the CBN continues to pursue is the orthodox monitoring policy,” he stated.

More so, analysts from the Nigeria Economic Summit Group said easing of inflation was also expected to influence monetary policy. They predicted 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 mark a departure from the previous tight monetary policy regime aimed at controlling inflation.

Long battle against inflation

CBN’s policies, including the exchange rate unification, have led to significant foreign capital inflows to the economy while reducing the its intervention in the forex market.

The floatation of the naira and the clearing of over $7 billion FX backlog improved the country’s outlook with foreign investors as well as multilateral organizations, like the World Bank describing it as bold intervention to improve the economy’s sustainability in the long run.

Cardoso disclosed that upon assuming office, his leadership prioritized rebuilding Nigeria’s economic buffers and strengthening resilience.

Before he assumed office, inflation, which had surged to 27 per cent, was one of the most pressing challenges, partly driven by excessive money supply growth. While the GDP growth had stagnated at a meagre 1.8 per cent over the previous eight years, money supply expanded rapidly, averaging about 13 per cent growth annually.

This imbalance not only fueled inflation but also contributed to a significant depreciation of the naira. He 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, totaling over N10 trillion, undermined market confidence and weakened the effectiveness of its policy tools.

Against these odds, the CBN under Cardoso has brought new hopes in the management of the financial system and economy. The current macroeconomic stabilization 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. The 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, which totaled $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 the country’s ability to manage its external debt burden, a positive signal for Nigeria’s Eurobonds.

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

According to head of investment research and global macro strategist, Ifeanyi Ubah, “We expect headline inflation to decrease to around 15 per cent in the first half of 2025, indicating a gradual return to economic stability.”

The report also emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility. This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.