For a few years now, Nigerian investors grew accustomed to high inflationary environments which came with high yields, however recent inflation figures indicate that tides might begin to change.
Nigeria’s headline inflation has been on a disinflationary trend for most of this year, dropping to 22.97 percent in May, from 24.48 percent in January.
This was largely driven by the rebasing of the figures, decline in petrol prices, and stability of the naira.
Analysts expect that this disinflationary trend continues. Cardinaltone, in a recent report, projects inflation to moderate further in July.
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“ This is underpinned by continued stability in core components and supported by a stable FX and transport backdrop. Notably, Dangote Refinery’s planned rollout of PMS and AGO distribution—targeting large-scale users (marketers, petrol dealers, manufacturers, telecom firms, aviation) with free logistics—and its investment in 4,000 CNG-powered tankers should ease energy distribution bottlenecks. This development could exert further downward pressure on energy prices, reinforcing the disinflationary trend,” it said in the report.
How inflation affects investors
Inflation is when prices rise on things you want to buy, and this worries investors.
Investors who have purchased bonds and stocks are hoping that the value of their savings will increase later, allowing them to afford more things.
So, an increase or decrease in inflation will affect the purchasing power of an investor.
How does a low inflation rate affect the interest rate?
Central banks typically have a mandate to maintain price stability, often targeting a specific inflation rate, exchange rate, and other macroeconomic variables.
In Nigeria’s case, President Bola Tinubu has an inflation target of 15 percent for the 2025 budget. When inflation is low and stable, or even below their target, central banks are more likely to lower their benchmark interest rates.
Olayemi Cardoso reaffirmed his commitment to this framework at a recent meeting.
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“If we continue with our course of orthodox monetary policy, which has already shown results, then inflation will moderate over time. Alongside that, interest rates will also begin to ease,” he said, indicating that a shift in policy stance would be considered only when the underlying economic indicators provide clear justification.
The Monetary Policy Committee (MPC) is scheduled to hold its next meeting in July to decide on Nigeria’s benchmark interest rates. A key factor in their decision will be the June inflation rates, which are currently projected to decline.
“There’s a high chance they might cut rates slightly, but they could also hold it for a while to try to get offshore investors and stabilise the fx market,” Tunde Abidoye, head of research at FBNQuest, an asset management firm.
Interest on loans
Lower inflation rates generally create a more favorable environment for borrowing due to lower interest rates. This means cheaper borrowing for businesses and individuals.
In 2024, the Central Bank of Nigeria (CBN) hiked benchmark rates by 800 basis points to 27.5 percent. This increase pushed commercial bank borrowing rates above 30 percent, with the average maximum lending rate closing December 2024 at 30.28 percent, up from 26.62 percent in December 2023, according to CBN’s “Money Market” statistics.
A drop in inflation and hence in interest rates will also see to a drop in lending rates from commercial banks.
Purchasing Power
Inflation is the rate at which the general level of prices for goods and services is rising, and consequently, the purchasing power of currency is falling. When inflation drops, it means that prices are either rising at a slower rate or, in the case of deflation, actually falling.
Lower inflation directly translates to a slower increase in the cost of everyday essentials like food, housing, and fuel. This makes it easier for individuals and families to afford their basic needs, leaving more disposable income for other goods and services.
As prices fall, the purchasing power of your money inreases. This means that over time, the same amount of money will buy more goods and services.
lower inflation rate effect on savings
The savings deposit rate of commercial banks in Nigeria is typically pegged at a minimum of 30 percent of the MPR but becomes inapplicable if customers make more than four withdrawals from their savings account within a month.
Read also: Nigeria’s inflation eases to 22.97% in May on steady food, utility costs
Over time, saving has become easier. The rise of digital apps has made room for savings accounts with higher interest than that of banks. With a high interest rate environment last year most offered rates up to 18%-30 percent per annum.
In a low-inflation environment, central banks might have more room to lower their benchmark interest rates (like the Monetary Policy Rate, MPR, which is currently 27.50% as of May 2025). This could, in turn, lead to a slight decrease in nominal savings account interest rates as the cost of funds for banks comes down, likewise fintech savings accounts.
Effect on investment;
Returns on Treasury Bills and bonds
Since inflation started declining in January, rates on Nigerian treasury bills have witnessed a gradual decline across the board.
At the most recent auction on Wednesday, the one-year bill fell to 23.21 percent from 29.21 percent at the first auction this year. Similarly, the 182-day bill has also dropped to 20.21 percent from 20.38 percent in the same period
While the 91-day bill dropped slightly to 18.64 percent from 18.85 percent.
Treasury bills are short-term investment securities issued by governments to finance national borrowing requirements. They are risk-free assets.
According to Samuel Sule, CEO, Renaissance Capital Africa, “a contraction in yields is expected as inflation edges downwards.”
The drop in yields has reflected in other instruments invested in treasury bills and short- term instruments.
The average yields on money market mutual funds are currently at 20 percent from their highs of 30 percent last year.
On the flip side, as inflation drops, real returns on treasury bills have been positive.
Move to the equities market
As lower inflation is associated with lower interest rates and increased spending, the demand for shares grows as companies show strong revenues – this results in share price appreciation. Lower inflation is also good news for stocks with lower, but reliable, dividend pay-outs. That’s because the more modest the rate of inflation, the higher the real interest earned per payment.
“ There will be a move to stocks because of the drop in yields on fixed income instruments during periods of lower inflation rates,” Abidoye said.
Read also: FX reforms fuel inflows to six-year high as naira, inflation stabilises
Lower inflation and bonds
Lower inflation is also positive news for bonds. Inflation dampens the attractiveness of bond coupon payments, which results in investors expecting a higher yield to maturity. This increases the debt burden of those issuing bonds, which curbs debt-financed investment spending.
