CBN MUST BALANCE PRICE STABILITY WITH ECONOMIC GROWTH
Read Time:4 Minute, 23 Second
By; Aina Daniel
Nigeria’s economic outlook in mid-2026 suggests that the country is moving from a period of aggressive stabilisation towards the more challenging task of stimulating sustainable growth without reversing recent gains.
Headline inflation fell to 15.91 per cent in June 2026, while core inflation stood at 15.92 per cent and food inflation remained higher at 17.52 per cent. The foreign exchange market has also stabilised significantly, with the official exchange rate around ₦1,380 to the dollar and the gap between the official and parallel markets narrowing to below two per cent.
External reserves have risen above $52bn, their highest level in 17 years, while official remittances have increased and broad money growth has slowed considerably from more than 56 per cent in 2024 to below 14 per cent.
Although these improvements have been supported by tighter monetary policy and foreign exchange reforms, other factors, including fiscal measures, food prices, base effects and supply conditions, have also contributed.
The Central Bank of Nigeria deserves credit for the progress made, but the focus is now shifting to how these gains can translate into higher investment, productivity, employment and improved living standards.
Price stability remains the CBN’s primary mandate, and economists generally agree that sustainable economic growth cannot be achieved in an environment of persistent inflation.
Inflation weakens purchasing power and savings, with low-income earners and people who depend largely on cash bearing a disproportionate share of the burden. It also influences business decisions, forcing companies to shorten contracts, preserve working capital and delay expansion.
The CBN’s tightening cycle, therefore, was not necessarily opposed to economic growth. The Monetary Policy Rate rose from 18.5 per cent in May 2023 to 27.5 per cent before easing began. The rate was reduced to 26.5 per cent in February 2026 and maintained at that level in July, alongside a 45 per cent Cash Reserve Requirement.
However, with inflation declining, concerns are growing over the cost of maintaining such restrictive monetary conditions.
A policy rate of 26.5 per cent means borrowing remains expensive, making several investment projects financially unattractive. Small and medium-sized businesses are particularly affected because they often lack access to alternative sources of financing available to larger corporations.
The high Cash Reserve Requirement also limits the funds banks can deploy for lending, while attractive yields on government securities provide banks with an alternative to extending credit to private businesses.
For banks, lending to businesses comes with credit, monitoring and default risks. Government securities, by comparison, offer relatively attractive returns with lower perceived risk. This creates an incentive for banks to favour public-sector investments over private-sector lending.
The key question, therefore, is when the economic cost of tight monetary policy becomes greater than the benefits of further inflation reduction.
There is no fixed point at which the CBN should begin easing. However, the decision should be based on evidence that inflation is firmly under control and that monetary easing would not threaten exchange-rate stability or reignite price pressures.
Five indicators are particularly important.
First, core inflation must continue to decline steadily, as temporary movements in food and energy prices may distort headline inflation.
Second, food inflation needs to moderate, given its significant impact on household spending, particularly among lower-income Nigerians.
Third, inflation expectations must remain anchored, with businesses and consumers becoming increasingly confident that inflation will continue to decline.
Fourth, exchange-rate stability must be maintained, ensuring that monetary easing does not trigger renewed pressure on the naira.
Fifth, liquidity and money-supply growth must remain under control. Rate cuts alone will not deliver sustainable growth if excess liquidity eventually fuels inflation or speculative activity.
The CBN must also recognise that monetary policy cannot achieve every economic objective simultaneously. Interest rates cannot independently deliver low inflation, rapid credit expansion, exchange-rate stability and strong economic growth.
The appropriate approach is therefore one of sequencing: restore stability, consolidate credibility and then gradually create conditions that support productive investment.
Recent steps by the CBN, including reforms aimed at improving liquidity management and monetary policy transmission, could help strengthen the connection between monetary policy and lending to the real economy.
However, simply lowering the MPR will not automatically translate into cheaper or more productive credit. Any additional liquidity must reach businesses and productive sectors rather than fuel foreign exchange speculation or other inflationary pressures.
The CBN should therefore approach any future easing cautiously but avoid excessive delay. Monetary policy operates with significant time lags, meaning the effects of previous rate increases may still be working through the economy, while the impact of new rate cuts could take months to become visible.
If inflation, food prices, expectations, exchange-rate stability and liquidity conditions continue to improve over several months, the MPC could consider gradual and well-communicated rate reductions.
The success of such a policy should not be measured solely by a lower MPR. The real test would be whether viable businesses can access affordable credit, investment increases, employment expands and economic activity improves without triggering another inflationary cycle.
Nigeria has already paid a significant price to restore macroeconomic stability. The next challenge is to preserve those gains while creating the financial conditions necessary for sustainable economic growth.
Happy
0 %
Sad
0 %
Excited
0 %
Sleepy
0 %
Angry
0 %
Surprise
0 %
0
0