As Nigeria’s Monetary Policy Committee (MPC) convenes for its 301st meeting on July 21-22 in Abuja, high expectations are mounting for a potential shift in its hawkish stance. This comes on the heels of two consecutive decelerations in the country’s inflation rate and a newfound stability in the foreign exchange market, prompting optimism among some analysts for a downward review of interest rates.

The National Bureau of Statistics (NBS) recently delivered a cheering report for June, revealing that headline inflation moderated to 22.22 per cent, a decline from 22.97 per cent in May. This marks the second consecutive monthly drop, an improvement from the 34.19 per cent recorded in June 2024. Earlier in the year, the NBS had rebased the Consumer Price Index (CPI), which saw inflation drop to 24.48 per cent in January from 34.80 per cent in December 2024, altering the base from which current figures are assessed.

The forthcoming MPC meeting has, however, ignited divergent views among stakeholders. While some express confidence that the observed moderation in inflation and the relative stability of the exchange rate could pave the way for a marginal reduction in the Monetary Policy Rate (MPR), others contend that the MPC will likely maintain its current policy stance despite these encouraging signs of disinflation and FX stability. Regardless of the outcome, the MPC’s decision is widely anticipated to sustain price and exchange rate stability, while also ensuring continuous foreign exchange inflows into the Nigerian economy.

The Central Bank of Nigeria (CBN) has maintained rates twice this year and implemented six hikes last year in a determined bid to rein in runaway inflation. At its May meeting, the MPC had voted to maintain the benchmark interest rate at 27.50 per cent. That decision was rooted in cautious optimism, supported by initial signs of improving macroeconomic conditions. The committee at the time highlighted several encouraging developments, including the narrowing gap between official and parallel exchange rates, declining petrol prices, and a favourable trade balance, factors that collectively suggested a potential easing of inflationary pressures. MPC members had also acknowledged the relative stability of the foreign exchange market, emphasising the need for continued monetary reforms to strengthen investor confidence.

The MPC had at the crucial meeting, cautioned that reinflationary pressures remained significant, justifying the retention of elevated interest rates to contain persistent inflation risks. The Committee had also warned that any premature rate cut could undermine the naira’s stability, particularly given that recent forex gains were largely driven by high yields on Open Market Operation (OMO) bills, attracting short-term capital.

Looking ahead to the 301st meeting, analysts at Afrinvest Securities Limited expect the MPC to maintain its current policy stance. This projection, they argue, holds true even in light of emerging signs of disinflation and a more stable foreign exchange environment. Afrinvest attributes their conservative view to ongoing external risks, persistent food supply shocks exacerbated by recent insecurity and flooding, as well as uncertainties stemming from the delayed release of Nigeria’s rebased gross domestic product (GDP) figures for the first quarter of 2025.

Afrinvest West Africa had accurately predicted that inflation could drop as low as 22.2 per cent by June 2025. “Our view for the inflation projection is hinged on two major drivers. Firstly, the effect of the CBN’s strategic policy reforms has seen the naira strengthen in the month of June, up 3.6 per cent to close at N1,529.71. Secondly, the high base year effect from last year’s 34.2 per cent inflation reading is a contributing factor,” Afrinvest asserted.

Similarly, with inflation showing a steady disinflation trend and the exchange rate remaining relatively firm on the back of reform-led confidence, analysts at Cowry Research also anticipate a policy hold stance. They expect the Committee to maintain its data-dependent, cautious posture, aiming to balance price stability with the imperative of fostering economic recovery momentum.

However, not all prominent voices agree. Bismarck Rewane, managing director of Financial Derivatives Company Limited (FDC), has actively advocated for an interest rate reduction of 25 basis points (bps) to 25 per cent. In an emailed note to stakeholders,  Rewane argued that the easing of interest rates is supported by the latest forecast from the International Monetary Fund (IMF), which projects inflation will decline in the fourth quarter and further moderate to 18 per cent by 2026.

Rewane outlined the broader implications of a lower Monetary Policy Rate, including reduced borrowing costs for small businesses, which are critical for job creation and economic diversification, and renewed momentum in the productive sectors of the economy. FDC had accurately projected that inflation would drop to 22.65 per cent in June, down from 22.97 per cent. FDC attributed this reduction to a combination of factors, including a N100 reduction in Premium Motor Spirit (PMS) price, relative stability in the naira exchange rate, and a decline in money supply growth.

Despite the overall headline moderation, FDC expects food inflation to rise by 0.42 per cent to 21.56 per cent, up from 21.14 per cent, underscoring persistent pressures on household purchasing power. Core inflation, however, is projected to decline by 1.34 per cent to 20.94 per cent, down from 22.28 per cent. “The inflation numbers could have been worse if not for the relative stability of the exchange rate,” FDC noted.

The firm also stated that a further cut in ex-depot prices by Dangote Refinery could further reduce pump prices and potentially ease inflation, offering a tangible link between industrial output and macroeconomic stability.

Analysts at Cordros Securities project a cautiously optimistic stance for the second half of the year. They anticipate that GDP growth will remain  strong as economic strains induced by the recent reforms continue to ease. “With domestic inflation expected to continue easing, the Monetary Policy Committee may begin to consider a gradual pivot toward monetary easing,” they explained.

However, these analysts also indicated that the relatively tight global financial environment, coupled with uncertainties arising from global trade tensions and geopolitical instability, is likely to limit the extent of any interest rate cuts, regardless of domestic conditions.

Olayemi Cardoso, the CBN governor, has consistently emphasised the apex bank’s unwavering commitment to consolidating market gains and ensuring sustained improvement. “We will enhance collaboration with the fiscal sector by increasing the depth and regularity of our interactions to drive economic growth. With stabilizing forex rates, strengthened price controls, and rising investor confidence, the economy shows strong signs of resilience and recovery,” he stated.

Cardoso further clarified the CBN’s priorities, explaining that following positive developments in the foreign exchange market, the bank’s focus on enhancing liquidity and ensuring transparency in foreign exchange operations is essential. “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 affirmed.

Analysts at Lagos-based FBNQUEST Merchant Bank anticipate that the Olayemi Cardoso-led MPC will lower Nigeria’s high interest rates when it meets on Monday, given the observed slowdown in inflationary pressures. “With headline inflation easing for the third consecutive month and the exchange rate remaining relatively stable, we expect the committee to consider a measured policy rate reduction between the range of 25 to 50 bps when it meets next week,” the analysts noted in a report on Thursday.

The naira has indeed strengthened by 7.27 per cent this year, trading at $/1,530 at the alternative forex market on Thursday, up from $/1,650 in January. This appreciation is primarily underpinned by improving exchange rate expectations, subdued forex demand, and sustained CBN intervention, demonstrating the impact of recent reforms. Businesses, particularly those in the real sector, have largely welcomed the MPC’s previous decisions to maintain interest rates, recognising its role in supporting the naira’s rally and mitigating the rising cost of borrowing for imported inputs.

The MPC’s prior decisions were also anchored on expectations of strong medium-term GDP growth, largely driven by strong performance in the non-oil sector. The committee has also cited the sustained rise in domestic crude oil production, currently at 1.74 million barrels per day as a key factor likely to boost the oil sector’s contribution to overall economic output, thereby supporting foreign exchange earnings.

The MPC has acknowledged the recent rebasing of the Consumer Price Index and the revised weightings of basket components, noting that the updated methodology better reflects prevailing consumption patterns. It has projected that inflationary pressures would ease in the near term, supported by a relatively stable naira and the continued moderation in PMS prices. 

The committee also pointed to the recent appreciation of the naira, driven by improved foreign exchange liquidity. It commended ongoing central bank initiatives aimed at enhancing transparency and market confidence, including the rollout of the Electronic Foreign Exchange System and the Nigerian Foreign Exchange Market FX Code. The committee anticipates that these sustained policy initiatives will improve foreign direct and portfolio investments as investor confidence increases. The MPC also highlighted that the increased domestic crude oil production is expected to improve the current account balance and support forex reserve accretion, critical for long-term economic stability.

However, analysts observed that global geopolitical tensions, particularly the Russia-Ukraine war and ongoing conflicts in the Middle East, continue to pose downside risks to global GDP, which could indirectly impact Nigeria through trade and capital flows. Nevertheless, potential resolutions may arise as the new U.S. administration implements its policy interventions. Further risks include a looming global trade war, triggered by U.S. tariff increases, which could amplify inflationary pressures and dampen global economic growth, underscoring the delicate balance the MPC must strike between domestic imperatives and the unpredictable global economic landscape.