MARKET NEWS

Taiwo Ojoye

In this report, SAMI TUNJI explores how the Central Bank of Nigeria has held interest rates steady amid improved foreign exchange stability and rising external reserves, signalling cautious optimism following its 300th Monetary Policy Committee meeting. Despite slight inflation easing, concerns remain over high core inflation, global oil risks, and the need for consistent reforms to maintain market confidence and restore credibility

Amid rising global economic turbulence and mounting pressure on emerging market currencies, the Central Bank of Nigeria is holding the line. The naira, once the epicentre of currency crises and speculative arbitrage, has shown a degree of resilience not seen in recent years. Foreign exchange volatility has fallen below 0.5 per cent, and net external reserves, the CBN claims, have increased by over 600 per cent.

Following the 300th meeting of the Monetary Policy Committee, CBN Governor Olayemi Cardoso offered an optimistic yet cautious picture of the FX market. At a press briefing on May 20, 2025, Cardoso announced that the MPC resolved to hold the Monetary Policy Rate at 27.5 per cent. The Committee also retained the asymmetric corridor at +500/-100 basis points, the Cash Reserve Ratio at 50 per cent for Deposit Money Banks and 16 per cent for merchant banks, and the Liquidity Ratio at 30 per cent.

This unanimous decision marked the second pause in 2025, after six successive hikes in the previous year, as the apex bank sought to rein in runaway inflation. The CBN argued that a hold would allow it to monitor the effects of earlier tightening, assess global shocks, and stabilise the market amid uncertain macroeconomic conditions.

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The pause in rate hikes, however, raises questions about whether the CBN has done enough to suppress persistent inflationary pressures, which remain elevated and driven by cost-side factors beyond the bank’s direct control. The chairman of the Organised Private Sector of Nigeria, Dele Oye, insisted that the MPR should be reduced to prevent slowed business growth. “The economy cannot run on the 27.5 per cent interest rate. Nobody can borrow money at the current rate and make a profit from business,” he stated.

Oye, who also presides over the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, maintained that an increase in the benchmark interest rate, while able to control inflation, often leads to higher costs and increased uncertainty for businesses, which negatively impacts business operations and growth prospects.

However, the National President of the Association of Small Business Owners of Nigeria, Dr Femi Egbesola, commended the CBN for retaining the MPR at this meeting, especially after several consecutive hikes.

Defending the decision of the MPC, Cardoso said, “The overall trajectory is in the right direction. Not one particular aspect of managing the economy is a bullet that will solve all the problems. It is a multiplicity of different endeavours.”

Reduced FX volatility signals relative calm

At the MPC briefing, the CBN governor announced a drop in FX volatility. According to Cardoso, daily naira fluctuations have fallen to less than 0.5 per cent, a far cry from the highly erratic movements recorded after the June 2023 unification of exchange rates.

Cardoso presented this as an outcome of effective policy coordination. “If you look at the exchange rate, volatility has reduced from over four per cent a year ago to less than half of one per cent now. That’s an indication of stability,” he said.

Indeed, the spread between the Nigerian Foreign Exchange Market and Bureau De Change rates has narrowed considerably. The naira appreciated to N1,620 per dollar in the parallel market on Tuesday from N1,625 on Monday, reflecting a modest recovery in street-level demand for foreign exchange. However, the trend differed at the official Nigerian Foreign Exchange Market, where the naira recorded a slight depreciation. Data published by FMDQ showed that the currency weakened to N1,598.69 per dollar on Tuesday, May 20, 2025, compared to N1,597 the previous day. This figure represents a depreciation of N1.69.

The movement in both segments of the market led to a further narrowing of the exchange rate gap between the official and parallel windows. The spread closed at N21.31 on Tuesday, down from N28 on Monday. The naira has traded within a relatively narrow band in the official market over the past week, fluctuating between N1,595 and N1,603 per dollar.

The stability is seen as a reflection of sustained interventions by the CBN and improved market confidence. Analysts believe the appreciation in the parallel market could be linked to reduced speculative activity and increased dollar availability, while the marginal depreciation at the official window may be tied to residual demand pressures as the market adjusts to evolving liquidity conditions.

Reserves rise after months of decline

Nigeria’s net external reserves had risen from slightly over $3bn to $23bn in 2024. Cardoso described this as “a quantum leap” and attributed it to reforms, improved market confidence, and transparency.

The PUNCH earlier reported that Nigeria’s external reserves have recorded their first steady increase in 2025, rising by $364m between April 30 and May 14. This marks the first two-week stretch of steady growth since the reserves peaked at $40.92bn on January 6, according to figures obtained from the CBN. As of April 30, Nigeria’s gross reserves stood at $37.934bn but climbed to $38.289bn by May 14, representing a 0.96 per cent increase over 14 days. Though modest in absolute terms, the gain is significant as it signals a shift in market sentiment and may mark the beginning of FX stability after months of pressure on the naira.

The rebound comes after a prolonged decline in reserves from January through April, a period in which Nigeria lost nearly $3bn due to persistent demand for foreign exchange, weak oil earnings, and external debt obligations. According to the most recent data, the trend is reversing, offering some relief to policymakers grappling with a fragile exchange rate regime and macroeconomic headwinds.

Fitch upgrade amid global risks

The CBN was buoyed by a recent ratings upgrade from Fitch, which improved Nigeria’s outlook despite global uncertainties and persistent structural challenges. Fitch last month upgraded the country’s long-term foreign-currency issuer default rating to ‘B’, from ‘B-’, indicating a stable outlook. According to the rating commentary, “The upgrade reflects increased confidence in the government’s broad commitment to policy reforms implemented since its move to orthodox economic policies in June 2023, including exchange rate liberalisation, monetary policy tightening and steps to end deficit monetisation and remove fuel subsidies.”

Cardoso highlighted the timing of the upgrade as significant. “It came at a time when there were global economic headwinds and shocks and there was a lot of uncertainty,” he said. According to him, the upgrade signalled confidence in Nigeria’s economic reforms and suggested that the worst may be behind the country. However, while reforms around FX unification and subsidy removal have impressed external observers, the elevated inflation and fragile oil revenues continue to cast a shadow.

The MPC itself acknowledged concerns about falling crude oil prices, rising non-OPEC supply, and trade uncertainty stemming from U.S. policy actions. These external risks threaten to reverse some of the recent gains, especially if oil earnings fall short of budget assumptions.

Cardoso said, “The MPC, however, expressed concerns about the recent decline in crude oil prices, attributable to increased production by non-OPEC members as well as uncertainties associated with U.S. trade policy, which present new challenges for fiscal receipts and budget implementation.”

The International Monetary Fund earlier warned the Federal Government to remain vigilant in the face of mounting global trade tensions and tightening financial conditions, cautioning that Nigeria’s earnings from commodity exports could decline significantly if global demand weakens. Speaking at the Financial Stability Report press briefing in April, the Assistant Director in the IMF’s Monetary and Capital Markets Department, Jason Wu, acknowledged that Nigeria’s macroeconomic indicators had shown some resilience in recent months, supported by ongoing reforms and an improved policy framework. Despite the progress, Wu cautioned that Nigeria remains exposed to external vulnerabilities, especially as global financial markets face heightened uncertainty and investor risk appetite weakens.

Inflation eases, but cost pressures persist

The headline inflation rate dropped to 23.71 per cent in April 2025, down from 24.23 per cent in March. Month-on-month inflation saw a significant slowdown to 1.86 per cent from 3.9 per cent. Both food and core inflation components recorded declines, with food inflation easing to 21.26 per cent. The CBN credited the moderation to reforms and improvements in food supply.

Yet, inflation remains among the highest in Africa. While the pace of increase has slowed, the price level is still suffocating households and small businesses. The CBN governor admitted that core inflation, driven by electricity tariffs, FX pass-through, and logistics costs, remains elevated.

The World Bank’s lead economist for Nigeria, Mr Alex Sienaert, recently said monetary policy reforms had helped reduce inflationary pressures but noted that consumer prices remained high.

“We do need to acknowledge that price pressures remain elevated,” he said. “The battle against inflation continues, and to extend the military analogy a little bit, there’s a kind of tug of war… quite dense just at the moment.”

He added that recent changes to the Consumer Price Index by the National Bureau of Statistics had made it difficult to determine the current trend in inflation, noting, however, that continued coordination between fiscal and monetary authorities would be critical to restoring confidence.

The need for credibility

Throughout his briefing, Cardoso stressed the need to rebuild the CBN’s credibility. “We’re on a mission to restore confidence and build back trust,” he said, noting that consistency and transparency are now central to the bank’s ethos. He referenced the publication of audited financials, engagement with international investors, and cooperation with banks as part of that mission.

Indeed, confidence in Nigeria’s monetary institutions was severely damaged by opaque FX policies, unaudited reserves, and political interference in the recent past. The recent reforms are seen by many as a course correction. The CBN is expected to stay the course to cement its institutional independence.

While commending the increased transparency in the FX market, Fitch projected a modest depreciation of the naira in the short term. It said in its ratings commentary, “Greater formalisation of FX activity, including the Central Bank of Nigeria’s recent introduction of an electronic FX matching platform and a new FX code to enhance transparency and efficiency, along with monetary policy tightening, has led to a greater rise in FX liquidity and general stability in the FX market after a 40 per cent depreciation in 2024, closing the spread between the official and parallel exchange rates.

“Net official FX inflows through the CBN and autonomous sources rose by about 89 per cent in 4Q24, compared to an eight per cent rise in 4Q23. We expect continued formalisation of FX activity to support the exchange rate, although we anticipate modest depreciation in the short term.”

Speaking with The PUNCH, an Abuja-based economist, Aliyu Ilias, emphasised that confidence and integrity are essential to boosting liquidity in the market. He pointed out that while stability is the first crucial element in managing foreign exchange, addressing the supply side of FX is equally important. He acknowledged that the CBN has recently introduced numerous policy frameworks, but consistency and implementation remain key.