With a relative decline in headline inflation, the Central Bank of Nigeria is under pressure to cut interest rates, James Emejo writes
The National Bureau of Statistics (NBS) recently rebased the Consumer Price Index (CPI) which measures the rate of change in prices of goods and commodities, putting headline inflation at 24.48 per cent year on year in January 2025 compared to 34.80 per cent in preceding (using the old template).
The decline in inflation is a major relief to the economy given the unprecedented inflationary pressures occasioned by global and domestic headwinds including structural challenges in the country.
In response to inflation, the Central Bank of Nigeria (CBN) embarked on the tightening of monetary policy to rein in rising prices of goods and services and achieve its main mandate of price stability.
Under CBN Governor, Mr. Olayemi Cardoso, the apex bank had increased the Monetary Policy Rate (MPR), the benchmark interest by a total of 850 basis points as well as adjusted other monetary tools to curtail inflation.
The MPR is the rate at which the CBN lends to commercial banks and often determines the cost of borrowing in the economy.
The continued inflationary concerns had expectedly made borrowing from commercial banks expensive as manufacturers including small businesses groaned under high interest rates, with its attendant implications on the economy.
On the other hand, the CBN Governor, Mr. Olayemi Cardoso, had repeatedly vowed that the apex bank would not consider cutting MPR if inflation persisted.
He said the bank has a primary duty to maintain price stability, arguing that it would make no sense to pursue growth amid a high inflationary environment that ends up weakening the Naira and discouraging investments.
Essentially, the CBN’s major reason for hiking MPR was to respond to inflation, with Cardoso assuring that the bank would consider a downward review of rates when it is satisfied that inflation was no longer a threat.
Long Sought Relief
However, following the rebasing of CPI which saw the headline index drop remarkably, the CBN for the first in over two years, retained the MPR at 27.50 per cent with the asymmetric corridor of +500/-100 basis points around the MPR at its last meeting.
The apparent halt in the bank’s tightening regime came against the backdrop of recent stability in the Foreign Exchange (FX) market with the resultant appreciation of the exchange rate and the gradual moderation in the price of Premium Motor Spirit (PMS).
The central bank also left all monetary policy parameters unchanged including the Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) at 50 per cent, and that of Merchant Banks at 16 per cent as well as the Liquidity Ratio (LR) at 30 per cent.
Before the meeting, analysts had prevailed on the apex bank to halt further hikes in interest rates as the previous increases had already crippled most businesses.
However, Cardoso who addressed journalists after the meeting of the Monetary Policy Committee (MPC), explained that the committee was unanimous in its decision to hold rates at current levels, having expressed satisfaction over recent macroeconomic developments which are expected to positively impact price dynamics in the near to medium term.
The MPC also acknowledged the successes of the various policies by the CBN aimed at anchoring inflation expectations, easing exchange rate pressures, deepening financial inclusion, and improving the transmission mechanism of monetary policy.
The CBN governor had emphasised that but for the several interventions of the bank, inflation would have been much unbearable given the volume of liquidity in the economy before he assumed office.
He said, “So, our objectives have been and will continue to be to achieve stability in the foreign exchange markets and the financial markets. That’s our objective. And as long as that happens, we are confident that we will begin to see more investments coming in, which should spur the badly needed growth.”
Macroeconomic Improvements
Cardoso further acknowledged that there’s been greater confidence in the markets, a key ingredient that was missing in the equation, declaring that the CBN was now in a better position to begin the process of moderating rates.
He stressed that stability remained important, adding that” if investors do not see stability, they do not come to those markets”.
According to him, the Naira is a lot more competitive, with increasing interest from international investors who seek to invest in the country, adding that the MPC was particularly impressed by the stability in the Foreign Exchange (FX) market with the resultant appreciation of the exchange rate and the gradual moderation in the price of Premium Motor Spirit (PMS).
However, he said the central bank was still not oblivious to the risk of persisting inflationary pressures driven largely by food prices.
Justification for Monetary Easing
Only recently, Renowned economist and Chief Executive Officer of Financial Derivative Company Limited, Bismarck Rewane, commended the recent interventions by the CBN in the foreign exchange market, saying the policies are effectively stabilising the naira.
Rewane stressed that CBN’s core mandate included maintaining external reserves to safeguard the Naira’s value, a responsibility it was currently fulfilling.
He stated that the policies embarked upon by CBN had made the foreign exchange market more transparent, thereby bringing confidence into the market and reducing speculative activities.
Speaking on ARISE TV, Rewane said, “When the CBN or the federal government intervenes to stabilise or protect the value of the naira, that is exactly what they are supposed to do.
“Secondly, we must understand what happened in line with economic objectives. The fair value of the naira, based on purchasing power parity (PPP) analysis, is 1,002.15/$1. This means the naira is 26.35 per cent undervalued.
“If you intervene to protect an overvalued currency, that is bad, but if you intervene to support an undervalued currency, you are correcting a misalignment. That is what the CBN is doing, and we applaud them for it.”
Rewane underscored key economic data supporting the effectiveness of the CBN’s interventions, saying the spread between parallel and official exchange rates has narrowed from 15-20 per cent to less than one per cent.
He said market price discovery had improved, fostering investor confidence. According to him, Nigeria’s balance of trade has reached $18.6 billion, its highest in years; and depreciation of the naira has encouraged export growth and made import substitution more viable.
Rewane highlighted the CBN’s role in unifying multiple exchange rates, which previously created a fragmented market.
He said, “There were five or six exchange rates before now. The market was segmented, with price discrimination, CBN selling at one rate while others sold back at a different rate. The CBN has now de-segmented the market, increasing transparency and price discovery. Policies on zero-placement levels and other measures have reduced speculative activities and arbitrage, leading to stability.”
Analysts’ Perspectives
Following the macroeconomic achievements, experts believe 2025 will be characterised by a low-interest regime as the apex bank is expected to embark on a gradual easing of monetary conditions.
Nigeria’s Professor of Capital Market, Prof. Uche Uwaleke, told THISDAY that the MPC’s hold on MPR, coming at the beginning of the year, will most likely “witness a relatively low interest rate environment and a change in monetary policy stance which are pro-growth.”
He said, “It is a good decision by the MPC. It marks the end of an era of aggressive policy rate hikes against the backdrop of the rebased Consumer Price Index and stable exchange rate.
“It also signals stability in monetary policy which is good for planning purposes on the part of firms and households in particular.”
Also, renowned economist, Dr. Chijioke Ekechukwu, said the financial system had experienced an overstretched tightening for a long time for various reasons, some of which were outside the control of the CBN.
According to the former Director General, of the Abuja Chamber of Commerce and Industry (ACCI), “I am comfortable with the hold on MPR. This will ease the pressure on the money market, which has been experiencing hot foreign portfolio investments that were volatile and uncertain.
“With the hold on MPR, there will be stability. I expect gradual easing in subsequent MPC meetings as the economy grows and the inflation rate decelerates.”
Although the CBN has expressed willingness to reduce interest rates, this will largely be determined by the continued success in taming inflation in the coming months.(Thisday)
