Will CBN loosen or continue to tighten?

Nigeria’s latest inflation rate, announced on Monday by the National Bureau of Statistics (NBS), has put additional pressure on the Central Bank of Nigeria. But it is a pressure that pulls on both sides, to loosen or continue to tighten? The direction it chooses at the MPC meeting next week will carry significant implications for the economy, given a real interest rate of nearly 12 per cent.

How to handle this level of real interest rate is the challenge.  That is because the country’s monetary topography has witnessed noticeable changes over the past 12 months. On Monday, NBS reported an inflation rate of 15.1 per cent, as the disinflation that began early last year continued. With that, inflation has declined steeply, from 34.8 per cent in December 2024 to the January rate.

Despite this, the Central Bank of Nigeria has left its Monetary Policy Rate barely unchanged, besides the 0.5 per cent cut to 27 per cent last September. This column treated this issue sometime in the last quarter of last year. The continuing disinflation, an obvious policy target, has made a fresh look at it imperative, given the implications. As the MPC meets next week, it has become necessary to reexamine the issue.

We are dealing here with a paradox that confronts the MPC members. In the past year, the monetary landscape has morphed from a highly negative real interest rate to a real interest rate of approximately 12 per cent (27% interest rate -15.1 per cent inflation rate). What could be the trouble with this? Higher real interest rates could be deliberately employed as a policy variable to slow down the economy. This is because real interest rates technically make loans expensive for borrowers and for companies, investing in capital goods, expansion programmes, and new projects may slow down.

The consequence could be low GDP growth and low job creation arising from lower private-sector investments. Such a scenario certainly is not in sync with the reality of the economy, which needs a supply-side boost to spur growth.

The current situation is a product of the disinflationary trend that started early last year. It has arrived even without further rate hikes by the monetary authorities. This is why, to some analysts, it is a passive hike since it produces the same impact as the conventional hikes in rates. Credit conditions, borrowing costs, and business investment are bound to be impacted.

For the MPC members, this poses a problem they can no longer ignore. For them, the question is no longer how to fight inflation. As they prepare for next week, they must ponder the question of whether they can continue to keep rates at such a high level, which is obviously inflicting unnecessary economic pain.

With double-digit real rates, the economy could experience a decline or, at best, stagnation, because both consumption and investment spending would be cut by consumers and companies. Currently, borrowing costs are high for operations, small companies, farmers, and manufacturers. All need to raise their output now for the economy to experience a turnaround.

This makes a modest rate cut appropriate. In this case, a cut of 50 to 100 basis points  (between 0.5% and one percentage point) rate cut is perhaps the least we should expect from the members. After a long period of tightening and an equally long period of disinflation, this should not be seen as a weakening of the tight stance. It will also not mean that CBN’s battle against price instability has been abandoned.

Such a stance would signify the authorities’ recognition that monetary tightening has already occurred through market forces. It would also show recognition that policy should reflect the economy as it exists today, rather than the emergency that defined conditions a year and a half ago. This option will leave the real rates somewhere higher than 11 per cent, still restrictive by any reasonable historical standard, while sending a clear signal that the CBN is reading current data and adjusting its posture accordingly.

Going beyond this, to cut by about 200 basis points (2 percentage points) could have negative consequences.  Nigeria is still in a credibility-building phase, and the CBN is certainly not ready to toy with its record as the inflation-taming central bank. Besides, while the naira has been stabilised at the official window, it continues to face pressure in the parallel market.

Everything put together, continuing to hold the MPR at 27 per cent carry its costs. These costs may not be evident now, but over time they become visible. The risk of overtightening is real. Needlessly high real rates slow investment, constrain credit availability, and erode growth momentum at a moment when Nigeria’s recovery remains uneven and incomplete.

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