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

 

The Central Bank of Nigeria (CBN) on Tuesday reinforced its commitment to taming inflation and preserving exchange rate stability by leaving its benchmark interest rate unchanged at 26.5 percent, a move analyst 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 45.0 percent, the CRR for Merchant Banks at 16.0 percent, the 75 percent CRR on Non-TSA public sector deposits, and the liquidity ratio at 30.0 percent.

 

He said maintaining the current policy stance followed a thorough assessment of the balance of risks to the Nigerian economy.

 

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.