29th September 2025
After two years of aggressive monetary tightening, the Central Bank of Nigeria is finally easing the pressure. With five consecutive months of disinflation and the naira maintaining stability below N1,500 per dollar, the apex bank has reduced its benchmark rate for the first time since 2020. SAMI TUNJI examines the drivers of this policy shift, its significance, and the implications for businesses, households, and the wider economy
Inflation has long been Nigeria’s most stubborn economic headache. For years, prices of food, fuel and basic services climbed unchecked, eroding wages and leaving households worse off. In 2025, however, the country has recorded what the Central Bank of Nigeria called “sustained disinflation”, a steady slowdown in the rate of increase in prices.
The August reading marked the fifth consecutive monthly decline and the lowest rate so far this year. On a month-on-month basis, inflation slowed to 0.74 per cent in August, down from 1.99 per cent in July, accentuating the pace of disinflation. In August 2025, core inflation, which strips out volatile food and energy items, fell to 20.33 per cent, while food inflation dropped to 21.87 per cent, helped by falling prices of rice, maize and millet.
For Central Bank Governor, Olayemi Cardoso and his Monetary Policy Committee, this was enough evidence to justify a first interest rate cut under Cardoso and the first by the apex bank since September 2020. At its September 2025 meeting, the MPC lowered the Monetary Policy Rate by 50 basis points to 27 per cent. At a press briefing after the 302nd MPC meeting in Abuja, Cardoso described the move as cautious but necessary, citing the lagged effect of earlier monetary tightening, fuel price moderation, and improved harvests as reasons to expect inflation to keep decelerating.
The Bank is trying to strike a balance by easing borrowing costs for businesses and households without unleashing another surge in inflation. However, there are some risks. At over 20 per cent, inflation remains painfully high. Nigerians still spend most of their income on food, transport and housing, leaving little room to absorb shocks. Experts have repeatedly warned that without structural reforms to tackle insecurity in food-producing areas, poor transport networks and high energy costs, disinflation may stall. The CBN’s bet is that the current trajectory will hold.
The chairman of BUA Group, Abdul-Samad Rabiu, recently predicted that the naira will strengthen to between N1,300 and N1,400 to the dollar by the end of the year. He said, “I expect that the exchange rate is going to strengthen even further. I expect that the rate should come down to maybe N1,300 or N1,400 before the end of the year. And this is something that we should all celebrate.”
Earlier in July this year, Rabiu said the CBN’s reforms have eliminated the need for companies to lobby for FX. He criticised the previous FX system, where the official rate was significantly lower than the parallel market rate, noting that it created distortions and limited access for many businesses. He described the current FX regime as more transparent, contrasting it with previous practices that, according to him, created an artificial scarcity and forced companies to seek favours to access dollars.
Also, external reserves, which had plunged to alarming levels in 2023, climbed to $43.05bn by September 11, 2025, up from $40.51bn at the end of July. The apex bank now boasts an import cover of 8.28 months, giving it more leverage to manage shocks.
Management described the September rally as a significant milestone that could provide stability for the naira in both official and parallel markets. In their weekly report, they projected that reserves could rise to about $45bn by the end of 2025.
“The combination of steady offshore inflows, improved oil earnings, and planned external borrowings should keep reserves on an upward trajectory in the coming months,” the analysts said. “With stronger reserves, the CBN will have greater flexibility to sustain its interventionist approach in the FX market, which in turn should help maintain the relative stability of the naira.”
However, they also warned of potential risks. “Global financial volatility, a sudden reversal in portfolio inflows, or weaker oil production could challenge the resilience of the current momentum. Nevertheless, the build-up represents a significant achievement for Nigeria at a time when many emerging markets are facing external vulnerabilities,” the analysts added.
The CBN Governor further disclosed that the current account balance, too, turned favourable, recording a surplus of $5.28bn in the second quarter, nearly double the Q1 figure of $2.85bn.
Cardoso emphasised that the foreign exchange market is more liquid and predictable, helping to anchor inflation expectations and support economic recovery. “The Committee acknowledged the continued stability of the foreign exchange market and its critical importance in achieving rapid disinflation, and therefore called on the Bank to continue the implementation of policies that would further boost capital inflows and deepen foreign exchange liquidity,” he said.
Yet, the apex bank remains wary of threats from excess liquidity, especially those linked to fiscal disbursements from the Federation Account. The introduction of the 75 per cent CRR on non-TSA public deposits is designed to soak up surplus naira and prevent speculative demand for foreign exchange.
0 Comments