As the Central Bank of Nigeria (CBN) continues its crucial Monetary Policy Committee (MPC) meeting, the nation stands at a critical juncture in its policy trajectory.
After months of aggressive tightening that saw the MPR rise to historically elevated levels of 27.5 percent, policymakers face a complex web of competing pressures that will shape the economic landscape for months to come.
A recent BusinessDay survey of seasoned economists revealed a fascinating divergence in expectations, reflecting the genuine complexity of Nigeria’s current economic predicament.
In our comprehensive poll of 22 economists across academia, investment banking, and public policy sectors, we observed a clear majority of 16 economists (73 percent) expecting the MPR to be held at current levels. Three economists (14 percent) anticipate a modest cut of 25 basis points and another three (14%) expect a further hike of 25 basis points.
Read also: Holding the line: Why the CBN is likely to retain MPR at 27.5%
This distribution underscores the challenging trade-offs facing the CBN: the persistent need to combat inflation whilst addressing growing concerns about economic growth and credit accessibility.
Inflation conundrum
At the heart of the monetary policy debate lies Nigeria’s stubborn inflation challenge. With headline inflation registering 22.2 percent in June 2025—more than double the CBN’s single-digit target—the central bank continues to grapple with price pressures that have proven remarkably resistant to conventional monetary tools.
The inflation profile reveals the complexity of Nigeria’s price dynamics. Food inflation remains elevated at 30.1 percent, driven by seasonal factors, logistics bottlenecks, and ongoing security challenges in agricultural regions. Core inflation persists above acceptable levels, reflecting underlying demand pressures and cost-push factors. Meanwhile, FX pass-through effects continue to amplify imported inflation, particularly given the naira’s volatility throughout 2024 and early 2025.
Crucially, Nigeria’s inflation is not purely demand-driven. The key drivers remain largely structural, including exchange rate pass-through effects from naira depreciation, cost-push inflation from energy costs and logistics inefficiencies, structural bottlenecks in agriculture, trade, and transportation, and food insecurity combined with supply chain disruptions.
This structural nature of inflation suggests that monetary policy alone cannot fully address the price stability challenge, creating a policy trilemma for the CBN as it seeks to balance inflation control, exchange rate stability, and growth support.
Understanding MPR mechanism: More than just a number
The Monetary Policy Rate (MPR) operates as the fulcrum of the CBN’s interaction with the banking system, influencing liquidity conditions, borrowing costs, and ideally, price stability. The current asymmetric corridor framework—with rates at MPR plus 100 basis points for lending and MPR minus 500 basis points for deposits—creates a sophisticated transmission mechanism.
Under the current rate structure, the MPR stands at 27.5 percent, with the Standing Lending Facility at 28.5 percent (MPR plus 100bps) and the Standing Deposit Facility at 22.5 percent (MPR minus 500bps).
Despite this framework, monetary transmission remains frustratingly weak. Commercial lending rates to the real sector often exceed 30 percent, while access to credit remains severely constrained, particularly for small and medium enterprises (SMEs). The disconnect between policy intentions and real-sector outcomes highlights the institutional and infrastructure challenges within Nigeria’s financial system.
Read also: CBN’s survey shows 65.8% respondents want interest rate cut
Why hold makes sense
The overwhelming consensus among economists for maintaining the current MPR reflects several compelling arguments.
Firstly, signalling policy stability remains crucial. In Nigeria’s fragile macroeconomic environment, characterised by external debt servicing concerns, volatile FX markets, and tentative investor confidence, maintaining the rate provides crucial policy continuity. Sudden policy reversals could undermine the credibility painstakingly built through consistent monetary tightening.
Secondly, managing yield expectations has become increasingly important. Nigeria’s government securities already offer among the highest returns in emerging markets, making them attractive to foreign portfolio investors. Further rate increases may yield diminishing returns in terms of foreign capital attraction whilst significantly widening domestic credit costs.
Thirdly, avoiding domestic credit distortion remains a priority. Nigerian SMEs are increasingly distressed by prohibitively high borrowing costs. Additional tightening would further constrain liquidity and aggravate the credit crunch, potentially triggering broader economic distress.
Finally, awaiting transmission effects makes economic sense. Previous rate hikes need time to fully transmit through the economy. The lagged effects of monetary policy suggest that patience may be more prudent than additional intervention.
The contrarian view: A case for modest easing
Despite the consensus for holding rates, a compelling case exists for a modest 25 basis point reduction to 27.25 percent. This perspective, supported by emerging positive indicators, suggests that the CBN may have room to begin a gradual normalisation process. Several supporting factors strengthen the case for a rate cut. Improved investor confidence has emerged from recent developments that point to enhanced market confidence in the CBN’s policy framework. This includes increased transparency in monetary policy communication, more predictable policy outcomes building market confidence, and reduced uncertainty around policy direction.
Treasury bills market dynamics have also been encouraging. Recent treasury bills auctions have demonstrated encouraging trends, including declining auction rates despite strong demand, heavy oversubscription indicating robust investor appetite, and reduced risk premiums suggesting improved policy credibility. Oil market improvements further support this position. Nigeria’s fiscal and external position benefits from enhanced oil supply management, expectations of higher global oil prices, and improved revenue generation capacity.
Signs of fiscal discipline have begun to emerge. These include better revenue collection mechanisms, more disciplined spending patterns, and enhanced transparency in fiscal operations. Moderating inflation pressures, while still elevated, suggest potential moderation. Base effects are beginning to influence year-over-year comparisons, food supply chains have improved in some regions, and exchange rate dynamics are stabilising. Finally, policy evolution trends support this view. The CBN’s approach has evolved from aggressive tightening to consecutive hold decisions, suggesting a natural progression toward gradual easing as conditions permit.
Hawkish alternative: Further tightening considerations
A minority of economists advocate for additional tightening, arguing that inflation remains unacceptably high and requires more aggressive action, exchange rate stability demands continued high rates to attract foreign capital, and policy credibility requires demonstrable commitment to inflation fighting. However, this approach risks deepening economic stagnation, further constraining SME access to credit, and widening income inequality through reduced economic activity.
Read also: Nigeria’s CBN to cut rates as inflation cools, analysts say
Policy recommendations: A balanced approach
Given the complex trade-offs and competing pressures, the CBN should consider a nuanced approach that incorporates gradual policy normalisation, enhanced communication, improved transmission mechanisms, and fiscal-monetary coordination. If conditions permit, a modest 25 basis-point reduction could signal confidence in improving economic conditions while maintaining anti-inflationary credibility.
Clear, forward-looking policy communication can help anchor expectations and reduce market uncertainty. The focus should remain on enhancing the effectiveness of monetary policy transmission through better liquidity management, reduced reliance on OMO auctions, and improved banking sector intermediation. Strengthening alignment between monetary and fiscal policies will ensure consistent macroeconomic management.
Strategic patience with tactical flexibility
The CBN’s decision on July 22 will reflect more than just technical economic analysis—it will signal the bank’s confidence in Nigeria’s economic trajectory and its commitment to balanced policy management. Whether the committee opts for continuity through a hold decision or signals cautious optimism through modest easing, the choice must be grounded in careful assessment of both current conditions and future prospects. The emerging evidence of improved investor confidence, better fiscal discipline, and moderating inflation pressures provides a foundation for cautious optimism. However, the persistence of structural challenges and global uncertainties counsels against premature or aggressive policy shifts.
Nigeria’s monetary policy journey requires strategic patience combined with tactical flexibility. The CBN must remain prepared to adjust course as conditions evolve while maintaining its commitment to price stability and financial system integrity. The path forward demands not just the technical expertise but also the wisdom to recognise when economic conditions warrant policy adaptation. As Nigerians await the MPC’s decision, one thing remains clear: Nigeria’s economic future depends not just on getting the MPR right, but on building the institutional and structural foundations for sustainable growth and prosperity.
The central bank’s role, while crucial, is just one part of a broader reform agenda that must address the fundamental drivers of Nigeria’s economic challenges.
Whilst maintaining rates at 27.5 percent remains the consensus expectation, the case for a modest 25 basis-point reduction to 27.25 percent gains strength from improving fundamentals and enhanced policy credibility. The CBN’s decision will ultimately reflect its assessment of whether Nigeria’s economy is ready for the beginning of a gradual normalisation process.
