How MPC sustains fight against inflation, achieves exchange rate convergence

The CBN, through its various foreign exchange (FX) policies has achieved exchange convergence in the market. The official and parallel-market exchange rates for the naira converged for the first time in nearly two years on Thursday, according to data tracked by BusinessDay.

The naira was quoted at N1,510 at the parallel market on Thursday, at par with the official closing rate of N1,510/$ on Wednesday. The last time both rates were at par was in June 2023.

Bismarck Rewane, managing director/CEO, Financial Derivatives Company Limited, has commended the Central Bank for its policies that have led to the appreciation of the Naira in February 2025. Speaking on the Global Business Report, Rewane noted key economic factors that contributed to the currency’s performance.

Rewane, said “The market was previously segmented with multiple exchange rates, creating a price-discriminating monopoly where the central bank sold at one rate and bought at another. The CBN’s decision to desegment the market, increase transparency, and allow for price discovery has significantly enhanced efficiency.”

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He noted that prior to these reforms, speculation and arbitrage were rampant, leading to exchange rate volatility. The CBN’s structured interventions have reduced these activities, bringing stability to the Naira. “Last year, we saw a similar trend when the currency appreciated sharply after a 400-basis-point interest rate hike.

Inflation in Nigeria is expected to significantly drop in 2025 as the impact of Central Bank of Nigeria (CBN) reforms continue to drive growth and development in key sectors of the economy. Already, Nigeria’s annual inflation dropped to 24.48 per cent in January after several policy measures by the CBN-led Monetary Policy Committee brought positive results.

For instance, the MPC halted its policy rate tightening cycle at the first meeting of the year, the first pause since May 2022. The decision was part of sustained policy measures and deployment of monetary policy tools to keep a positive inflation outlook and keep the naira stable across markets.

From the stabilisation of exchange rates, the normalisation of energy prices following the subsidy removal to improved liquidity in the forex market, the economy has what it takes to achieve price stability within the year.

Expectedly, Comercio Partners, in its 2025 macroeconomic outlook, highlighted that the rebasing of Nigeria’s CPI to 2024 would also create statistical effects that could lower inflation figures.

The Comercio Partners reports, stressed the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility.

This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

According to Ifeanyi Ubah, head of investment research and global macro strategist, Comercio Partners, “We expect headline inflation to decrease to around 15 percent in the first half of 2025, indicating a gradual return to economic stability.”

The report also emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility. This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

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MPC’s determined efforts

The need to tame inflation and sustain exchange rate stability forms part of the key parameters that determined the Monetary Policy Committee (MPC) decision to keep rates unchanged at its 299th meeting held last week in Abuja.

Accordingly, the Committee voted to hold the Monetary Policy Rate (MPR) constant at 27.50 per cent and retain all other parameters – Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks at 50 per cent and 16 per cent, respectively; the asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30 per cent.

Nigeria’s annual inflation rate stood at 24.48 per cent in January, NBS said. The figure is well down from the previous month’s figure after Nigeria’s CPI was rebased for the first time in more than a decade.

Cardoso said the apex bank is now more than ever, consolidating market gains and ensuring sustained improvement is crucial.

“We will enhance collaboration with the fiscal sector by increasing the depth and regularity of our interactions to drive economic growth. With stabilising forex rates, strengthened price controls, and rising investor confidence, the economy shows strong signs of resilience and recovery,” he said.

Cardoso explained that ⁠following positive developments in the FX market, the CBN’s focus on boosting liquidity and maintaining transparency in forex operations is sacrosanct.

“Our Objectives have been and will continue to be, to achieve stability in the foreign exchange and the Financial markets. CBN will continue to embrace orthodoxy and stay the course. We remain vigilant and will not take anything for granted, inflation has been too high for too long, and our goal is to bring it down from double digits to single digits in the medium to long term,” he said.

The naira strengthened by 6.95 per cent to N1,510/$ in the parallel market on February 20, driven by exchange rate expectations, subdued forex demand, and sustained CBN intervention.

Businesses, especially real sector operators applauded the MPC decision to hold rates, so as to sustain naira rally and cut rising cost of borrowing.

These decisions were based on the fact that the Committee anticipates robust GDP growth in the medium term, driven by strong contributions from the non-oil sector. Additionally, the MPC noted the sustained rise in domestic crude oil production (1.74mb/d) and expects an improved contribution from the oil sector, further strengthening overall GDP growth.

The MPC acknowledged the rebasing of the CPI as well as the adjustments in the weights of items in the CPI basket, citing that the new methodology reflects current consumption patterns. Furthermore, the Committee expects inflationary pressures to moderate in the near future, helped by a relatively stable naira and gradual moderation in PMS prices.

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The MPC highlighted the recent naira appreciation buoyed by improved FX liquidity. The Committee also acknowledged the current measures by the CBN to foster transparency and credibility in the FX market, including the implementation of the Electronic Foreign Exchange System (EFEMS) and the Nigerian Foreign Exchange Market (NFEM) FX Code.

The Committee expects the sustained policy initiatives to improve Foreign Direct and Portfolio investments as investors’ confidence increases. The MPC also highlighted that the increased domestic crude oil production is expected to improve the current account balance and support FX reserve accretion.