CBN’s rate hold reinforces inflation fight despite easing price pressures

The Central Bank of Nigeria (CBN) reinforced its commitment to taming inflation and preserving exchange rate stability by leaving its benchmark interest rate unchanged at 26.5 percent for the second consecutive time on Tuesday, a move analysts said reflects caution despite easing price pressures.

At the end of its two-day Monetary Policy Committee (MPC) meeting in Abuja, Olayemi Cardoso, governor of the CBN, said the committee unanimously voted to retain the Monetary Policy Rate (MPR) at 26.5 percent. It also retained the asymmetric corridor around the MPR at +50/-450 basis points, the Cash Reserve Ratio (CRR) for Deposit Money Banks at 45 percent, the CRR for Merchant Banks at 16 percent, a 75 percent CRR on Non-TSA public sector deposits, and the liquidity ratio at 30 percent.

“Eleven months of disinflation, and quite frankly, from every indication, we were expecting that by early 2027, we would be where we want to be in terms of inflation and firmly on track for single digits,” he said.

“Unfortunately, shocks that came that were not anticipated in that manner have gone on a lot longer than could have been anticipated.”

The governor, however, said recent moderation in inflation showed that monetary policy measures were beginning to take effect.

“We are pleased, however, on two counts. One is the fact that inflation has moderated. Albeit slightly, it has moderated,” Cardoso said. “Headline inflation has moderated, so that gives us an indication that the tools we have implemented so far are bearing effect.”

Official data showed headline inflation eased marginally to 15.91 percent in June from 15.93 percent in May, ending a three-month period of increases. However, food inflation accelerated to 17.52 percent from 16.96 percent, reflecting supply constraints and higher transportation costs.

The decision was widely expected by economists, who had predicted the CBN would maintain its tight monetary stance as inflation, though easing, remains vulnerable to domestic and global risks. It reflects the bank’s commitment to sustaining the moderation in inflation, preserving exchange rate stability, and consolidating the gains from recent macroeconomic reforms amid heightened geopolitical uncertainties, particularly in the Middle East, which continue to pose upside risks to energy prices and inflation.

Bismarck Rewane, managing director/CEO of Financial Derivatives Company Limited, said the MPC’s decision reflects the CBN’s determination to avoid easing policy too soon and jeopardising progress made in curbing inflation.

“When you take all of that into consideration, it tells you that even at 15 percent inflation and an MPR of 26.5 percent, there’s enough room to manage and bring inflation down,” Rewane said during a CNBC Africa interview following the MPC announcement. “The nominal anchor for inflation management is the policy rate, and by not going down, we are being cautious to ensure that you don’t precipitously bring down rates. It’s the right strategy.”

He noted that while inflation has not fallen sharply, underlying indicators point to gradual improvement, citing the appreciation and stability of the naira, rising external reserves and moderation in money supply. However, he warned that external shocks, including geopolitical tensions in the Middle East and volatility in global commodity markets, continue to pose upside risks to inflation, justifying the central bank’s cautious approach.

Nnamdi Nwaizu, co-managing partner, Comercio Partners, said the decision had already been priced in by financial markets, with investors overwhelmingly expecting the MPC to hold rates steady.

“About 99 percent of the market expected that things will stay as they are, so you’re not going to see much of a market reaction,” Nwaizu said. He added that the current high-yield environment continues to attract foreign portfolio investors into Nigeria’s fixed-income market while supporting returns for domestic investors.

According to Nwaizu, although elevated borrowing costs remain a challenge for businesses, many manufacturers would rather operate in an environment of exchange-rate stability than one characterised by lower interest rates and currency volatility.

“For manufacturers, they would rather have stable exchange rates than lower interest rates. If you ask them which one they prefer, they’ll tell you they’d rather have stability in the exchange rates,” he said, noting that stable foreign exchange conditions have supported earnings growth for several fast-moving consumer goods companies despite the high interest rate environment.

Analysts said the MPC’s latest decision signals that the CBN remains focused on consolidating recent gains in inflation and exchange rate stability before considering any monetary easing, particularly as election-related spending, seasonal import demand and global uncertainties could keep inflationary pressures elevated in the months ahead.

However, across Africa, the trend has been mixed. BusinessDay’s review of monetary policy decisions across 17 African central banks illustrates a changing landscape. As of July, five central banks have raised interest rates, nine have kept policy unchanged, and three have continued easing, highlighting an increasingly fragmented monetary policy environment as countries respond to differing inflation dynamics and domestic economic conditions.

Ethiopia raised its benchmark Monetary Policy Rate to 16 percent from 15 percent, marking the first increase since the rate was introduced in 2024 and the East African nation’s first monetary tightening in nearly a decade. The move for Africa’s second most populous nation came as inflation accelerated to a year high of 13.9 percent in June, after falling into single digits in December for the first time in almost a decade.

The National Bank of Ethiopia also removed its 24 percent cap on annual credit growth for commercial banks, signalling confidence that tighter monetary policy can contain inflation while allowing banks greater flexibility to lend.

Tanzania increased its key interest rate by 50 basis points to 6.25 percent, its first hike since April 2024, to keep inflation within its three to five percent target range. Although inflation remained relatively contained at four percent in June, policymakers cited risks from external shocks and currency weakness. The Tanzanian shilling has depreciated 7.4 percent against the US dollar as of July 19, making imported goods more expensive and increasing inflationary pressures.

Namibia raised its repo rate by 25 basis points to 6.75 percent after holding rates steady for three consecutive meetings. The central bank said the move was necessary to contain inflationary risks from higher energy prices and protect the peg between the Namibian dollar and the South African rand. Inflation in the Southern African nation rose to 4.4 percent in June, the highest level in 15 months, prompting the bank to revise upward its inflation forecasts for 2026 and 2027.

Rwanda has been among Africa’s most aggressive central banks this year. After a 50-basis-point increase in February, it followed up with a 100-basis-point hike in May, taking its benchmark rate to 8.25 percent, the highest since 2009. Policymakers said tighter policy was needed after inflation surged to 12.7 percent in June, its highest level in nearly three years.

South Africa delivered its first interest-rate increase since 2023 in May, raising the repo rate by 25 basis points to 7 percent as policymakers warned that higher oil prices and geopolitical tensions could trigger second-round inflation effects.

Inflation accelerated to 4.5 percent in May, moving further away from the central bank’s preferred 3 percent target. In a recent report, Bank of America said it expects inflation in the continent’s largest economy to rise to 4.7 percent before moderating and forecasts another 25-basis-point increase at the South African Reserve Bank’s next meeting taking place on Thursday before policymakers pause.

Others opt for patience

While a growing number of African central banks have resumed tightening policy, most are still choosing to keep interest rates unchanged, arguing that existing borrowing costs remain restrictive enough to contain inflation while supporting fragile economic recoveries.

Morocco has held its benchmark interest rate at 2.25 percent since September, extending its longest period of policy stability in years. Although inflation eased to 1.2 percent in May, policymakers continue to monitor rising energy prices and imported inflation risks. The central bank expects inflation to average 1.5 percent this year, supported by stronger agricultural output and resilient economic growth.

Mozambique kept its benchmark MIMO rate unchanged at 9.25 percent for a second consecutive meeting, citing uncertainty over global fuel prices and the potential impact of Middle East tensions on inflation. While leaving rates unchanged, the central bank tightened liquidity by raising the reserve requirement ratio on local currency deposits, underscoring its determination to contain inflation without further increasing borrowing costs.

Kenya also maintained its benchmark rate at 8.75 percent, saying the current stance remains appropriate to anchor inflation expectations and support exchange-rate stability. Inflation in East Africa’s biggest economy eased to 6.4 percent in June after accelerating for three consecutive months, with policymakers expecting price pressures to remain manageable, supported by favourable weather, government fuel measures and a stable shilling.

Egypt extended its pause by leaving its benchmark interest rate at 19 percent, marking a third consecutive hold after an almost year-long easing cycle. Headline inflation slowed to 14.3 percent in June, while economic growth moderated amid geopolitical uncertainty and weaker global demand. The central bank expects inflation to continue easing over the medium term but believes it is too early to begin loosening policy further.

Uganda has kept its benchmark lending rate at 9.75 percent since October 2024, maintaining that its current policy stance remains appropriate even as inflation edged up to 3.7 percent in June. Policymakers expect inflation to rise moderately in the second half of the year before stabilising around the central bank’s target, while economic growth remains supported by stronger exports and investment.

Botswana, which surprised markets with a 200-basis-point rate hike in April, chose to leave borrowing costs unchanged at 5.5 percent in June. The central bank said it wanted time to assess the impact of earlier tightening, even as inflation accelerated to 10.7 percent in May, driven largely by higher energy prices.

Tunisia also maintained its benchmark interest rate at 7 percent, citing easing inflation and continued uncertainty over the global outlook. Annual inflation slowed to 5.3 percent in June, its lowest level in three months, giving policymakers room to remain patient.

Nigeria had already maintained its interest rates at 26.5 percent on Tuesday, while Ghana is also expected to maintain their stance at Wednesday’s monetary meeting after inflation slowed to single digits.