When members of the Monetary Policy Committee take their seats at the Central Bank of Nigeria headquarters in Abuja for their 307th meeting, they will have a stronger case for easing than at either of their previous two meetings.
Inflation has fallen for three consecutive months. More importantly, the underlying measures show a broader moderation in price pressures: monthly inflation has slowed sharply, core inflation has fallen and food inflation has finally turned lower.
Yet the numbers do not make a rate cut inevitable. The question facing the MPC is no longer simply whether inflation is falling, but whether it is falling for reasons durable enough to justify easing monetary conditions while energy costs, election-related liquidity and structural supply pressures threaten to reverse some of the gains.
According to the National Bureau of Statistics, headline inflation fell to 15.39 percent in August from 15.43 percent in July and 15.91 percent in June. After rising through March, April and May to a peak of 15.93 percent, inflation has declined in each of the past three months. It is now 7.75 percentage points below the 23.14 percent recorded a year earlier.
The monthly numbers are more revealing. Month-on-month inflation slowed to 0.71 percent in August from 1.57 percent in July, its lowest pace this year. Core inflation fell to 13.29 percent from 14.97 percent, while food inflation declined to 19.57 percent, its first fall in six months. Food’s monthly rate also dropped sharply to 1.02 percent from 5.56 percent. Together, the figures provide a materially stronger disinflation signal than the committee had at its previous two meetings.
Read also: Food, transport, housing drive inflation despite slower price growth
The case for a cut is getting stronger
The MPC has kept its policy rate at 26.5 percent since February, when it cut by 50 basis points. The improving inflation trajectory, stronger external buffers and calmer foreign-exchange market have since created more room for another reduction.
Gross external reserves stood at $54.209 billion on September 7, while the naira has traded around N1,320 to the dollar at the official window. Remittances through licensed operators reached a record $947 million in July. The money market is also moving in a direction consistent with lower rates.
At the September 9 Treasury-bill auction, the CBN allotted N1.054 trillion and reduced the stop rate on the 364-day bill by 22 basis points to 16.62 percent. It was the third consecutive reduction on that tenor, taking the cumulative decline to 97 basis points. Total bids across the three tenors reached about N2.64 trillion against N750 billion offered.
For Abayomi Fashina, Group Risk Manager at STL Capital, the combination of softer inflation and declining market rates has strengthened the case for a cut. “Since inflation is declining and interest rates are dropping across the board, I am expecting a 50-basis-point reduction in the policy rate,” Fashina said.
At 26.5 percent, the MPR is now about 11.1 percentage points above August headline inflation. The widening gap illustrates just how restrictive monetary policy has become relative to the current inflation rate. But that is also where the argument for holding begins.
The problem is what comes next
The recent fall in inflation does not mean the forces driving prices have disappeared. Food inflation remains elevated and the improvement is uneven across the country. Rural month-on-month inflation accelerated to 1.79 percent in August from 0.78 percent, even as urban inflation slowed to 0.28 percent. Year-on-year food inflation remained as high as 38.85 percent in Adamawa and 37.96 percent in Zamfara.
For Faruq Quadri, economist at SPEC-Matrix, the risk is that renewed energy-price pressures could begin feeding into transport and other domestic costs, eroding the recent disinflation gains.
“The MPC is likely to hold the rate at this meeting because of the renewed energy shock. Crude oil prices have risen sharply, and this is already feeding into transport fares. If that persists, it could reverse some of the gains we have seen in disinflation,” Quadri said.
The approaching election cycle adds another source of uncertainty, he said, as higher liquidity could complicate the inflation outlook.
“The election cycle is likely to move in the same direction as liquidity, putting additional pressure on prices. In that environment, holding the rate is safer to avoid further distortions to price stability,” Quadri said.
Idris Oyekan, capital market and credit rating analyst at Quantum Zenith, also expects the CBN to hold, citing the external transmission of renewed geopolitical tensions.
“I expect the MPC to hold the policy rate at the current level. The resumption of the war has pushed oil prices higher, and the resulting increase in energy and shipping costs could feed into the prices of imported products,” Oyekan said. “The regulator will likely continue to monitor these developments and assess how they transmit into domestic inflation before making any adjustment to the policy rate,” he said.
For Muda Yusuf, chief executive of the Centre for the Promotion of Private Enterprise, the dilemma is even broader. He argues that keeping rates high is already distorting financial intermediation, while easing too soon would risk reigniting inflation that is increasingly being driven by structural factors beyond the reach of monetary policy.
“The inflation numbers are showing some easing, so further tightening is not the way to go, particularly when borrowing costs have already become a major constraint for businesses and investors,” Yusuf said.
“We are seeing investors look for alternatives such as commercial paper, while financial intermediation is being undermined by the high cost of funds. At the same time, I would not expect the MPC to relax the policy rate yet because the inflation outlook is still not particularly favourable, especially with the pressure coming from energy costs.” Yusuf said a significant share of the remaining inflation pressure is structural rather than monetary. “So, I do not expect either a rate hike or a rate cut at this meeting,” he said.
The result is a narrower policy choice than the headline inflation number suggests. The MPC can cut because the disinflation trend has broadened and market rates are already falling. But it can also hold because the decline has yet to prove durable against renewed energy costs, uneven food-price pressures and the liquidity effects of the approaching election cycle.
The decision, therefore, is less about whether inflation has improved, it clearly has than about how much confidence the committee has that the improvement can survive the next shock.
For Fashina, the evidence is sufficient for a 50-basis-point cut. Quadri, Oyekan and Yusuf see the risks differently: not as a case for another tightening, but as reasons to preserve the existing stance until the durability of the disinflation becomes clearer. That makes September’s meeting a test of the CBN’s confidence in the quality of Nigeria’s disinflation, not merely its latest headline reading.
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