Follow Us on Google
By Chinwendu Obienyi
As the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) takes its decision on interest rate today, a broad spectrum of economic analysts are offering sharply contrasting expectations regarding the likely direction of monetary policy.
While some anticipate a moderate reduction in the Monetary Policy Rate (MPR), others are urging a deeper cut or a pause entirely, citing a mixed economic backdrop.
Since the MPC’s last meeting in May, the country’s macroeconomic environment has evolved, showing signs of resilience in the face of lingering global uncertainties.
Specifically, the naira has recorded a period of relative stability against the dollar, inflation has continued on a disinflationary trend, and foreign exchange market liquidity has improved following reform-led policies by the CBN.
These factors have emboldened some analysts to argue that the time is ripe for policy easing to stimulate growth. Others, however, are urging caution, warning that premature loosening could undermine the hard-earned gains in macroeconomic stability.
The consensus agrees that the MPC will look at various factors before making its decision which will be convened to the public. These factors include; Global headwinds, domestic economy, headline inflation, capital inflows and of course the outlook for the country’s FX reserves and exchange rate.
Global headwinds
Trade tensions have softened from the tariff hike announcements in April. The US President paused the implementation of reciprocal tariffs, allowing countries to negotiate lower tariffs for 90 days (April 9 – July 8), which was recently extended to August 1. Three countries, including the UK, China, and Vietnam, have so far reached a deal with the US to lower tariffs, while a few other countries remain in active discussions with the US on new trade arrangements.
Despite renewed tariff threats from the US, market volatility has been relatively subdued compared to the heightened swings observed in the second quarter (Q2) of 2025. Additionally, geopolitical tensions have eased after the U.S brokered a ceasefire deal between Israel and Iran. However, uncertainty lingers over the broader economic implications of existing tariffs and ongoing trade negotiations, posing risks to global stability.
On monetary policy, central banks have maintained a cautious approach, as they continue to assess the impact of the increased trade tariffs and geopolitical uncertainty on their respective economies. In June, the US Federal Reserve again kept its policy rate unchanged at the 4.25 – 4.50 per cent range for the fifth time in a row, citing that economic activity has stayed strong while inflation risks remain tilted to the upside, primarily due to higher tariffs. The Bank of England (BoE) also held its benchmark interest rate steady at 4.25 per cent in its June 19 monetary policy meeting, highlighting persistent inflation risks that may be fueled by higher energy prices resulting from the escalation of the Middle East conflict. On the other hand, the European Central Bank (ECB) opted to cut its three key interest rates for the fourth time this year, including the deposit facility, the main refinancing operations and the marginal lending facility, by 25 basis points (bps) apiece to 2.00 per cent, 2.15 per cent and 2.40 per cent, respectively, given their expectation of weaker economic prospects induced by higher trade tariffs.
Domestic economy
Economic activity remained on a firm upward trajectory in Q2 2025, supported by easing inflationary pressures and naira stability, both of which have strengthened business confidence and production. The CBN composite PMI averaged 52.2 points in Q2 2025 (Q1 2025: 51.3 points | Q2 2024: 48.0 points), indicating broad-based expansion across the agriculture, industry, and services sectors. Although crude oil production was somewhat volatile (Q2 2025: 1.68 mb/d vs. Q1 2025: 1.67 mb/d), average output remained above 2024 levels (Q2 2024: 1.47 mb/d), reflecting ongoing recovery in the oil sector, supported by improved investment flows and fewer operational disruptions. According to analysts at Cordros Research, real GDP is estimated to grow by 4.10 per cent year-on-year (y/y) in Q2 2025 (Q1 2025: 3.61 per cent)/Q2 2024: 3.20 per cent and expect the solid growth momentum to persist through H2 2025.
Headline inflation
According to the National Bureau of Statistics (NBS), headline inflation eased by 75bps to 22.22 per cent y/y in June (May: 22.97 per cent y/y), marking the third consecutive month of moderation. Analysing the breakdown, consumer prices increased across the food (+83bps to 21.97 per cent y/y), and core inflation (+48bps to 22.26 per cent y/y) baskets.
Other News
On a month-on-month basis, headline inflation increased by 15bps to 1.68 per cent month-on-month (m/m) (May: 1.53 per cent m/m), in line with the increase in both food and core inflation. Specifically, food inflation surged by 107bps to 3.25 per cent m/m (May: 2.19 per cent m/m), reflecting a rebound in the imported food sub-basket (+30bps m/m vs May: -170bps m/m) despite the moderation in the farm produce sub-basket, (-189bps m/m vs May: +269bps m/m). At the same time, core inflation increased by 136bps to 2.46 per cent m/m (May: 1.10 per cent m/m) primarily due to higher prices across Transport, ICT, Alcoholic Beverages and Tobacco sub-baskets.
Capital inflows
Capital inflows have rebounded since global financial pressures eased in May. The elevated naira yields and a stable FX market have continued to attract foreign portfolio investments and bolster investor confidence. Specifically, inflows from foreign investors surged by 315.0 per cent to $2.73 billion in June, the highest since March 2019, from $657.4 million in April, with FPI inflows accounting for 97.2 per cent of total foreign inflows.
The rebound in inflows led to a decline in CBN interventions as demand pressures waned. Specifically, inflows from local sources fell sharply by 30.0 per cent to $2.11 billion (April: $3.02 billion), with the CBN segment declining by 637.7 per cent to $183.00 million, from $1.35 billion in April. The naira responded positively, appreciating by 3.97 per cent m/m to an average of N1,550.82/$1 in June (May: N1,595.91/$1), and has remained stable so far in July, trading between N1,528.00/$1 and N1,535.00/$1.
On the other hand, the FX reserves have declined by 8.4 per cent year-to-date (ytd), closing July 11 at $37.43 billion, reflecting relatively stronger CBN market intervention this year and external debt servicing amid still weak oil receipts.
Analysts’ views
Under Governor Olayemi Cardoso, the CBN has made clear its intention to pursue market-based reforms while rebuilding credibility through predictable, transparent policy actions. The July MPC meeting presents a key opportunity to reinforce that approach. Analysts say the decision whether to cut, hold, or guide for future easing must be clearly communicated to avoid triggering market anxiety.
In its pre-MPC note, Cordros Research projected a measured shift in the MPC’s stance, suggesting that conditions may now permit a 50bps cut in the MPR, which currently stands at 27.5 per cent.
The research-based firm noted that it expects the MPC to tread cautiously, balancing growth support with its mandate to preserve price and exchange rate stability.
“While some policy easing is likely, the Committee is expected to ensure that interest rate levels remain sufficiently attractive to sustain capital inflows and anchor inflation expectations amid tight global liquidity and persistent uncertainty. As such, we expect the MPC to reduce the MPR by 50bps to 27 per cent at its meeting next week. In a bid to steadily ease monetary conditions, the MPC may also lower the Cash Reserve Ratio (CRR) for Deposit Money Banks and Merchant Banks by 500bps to 45.0 per cent and 200bps to 14.0 per cent, respectively, while retaining other parameters, including the asymmetric corridor at around the MPR at +500/-100bps and Liquidity Ratio at 30 per cent”, the firm said.
Afrinvest, on the other hand, holds a more dovish outlook. The Lagos-based investment firm sees scope for up to 150bps in rate cuts in the second half of 2025, citing both local and global macroeconomic dynamics.
“Given the less attractive rates in advanced markets and the steady decline in domestic inflation, there is a window for more aggressive easing. Furthermore, FX reserves are no longer depleting rapidly thanks to reduced import bills, especially for petroleum products, and improved crude oil output is helping with external revenue”, Afrinvest said.
Yet, not all analysts are convinced that a rate cut is appropriate at this time. Cowry Asset Management is urging the MPC to maintain a hold stance, pointing to the still-elevated inflation rate despite its slowing trend and the need to consolidate gains in monetary and exchange rate stability.
“With inflation showing a steady disinflation trend and the exchange rate remaining relatively firm on the back of reform-led confidence, we anticipate a policy hold stance, as the Committee maintains its data-dependent, cautious posture to balance price stability with economic recovery momentum”, it said.
