CBN faces policy dilemma amid inflation risks

As Nigeria grapples with rising inflation and economic instability, the Central Bank of Nigeria (CBN) finds itself in a policy dilemma—balancing the need to tame inflation while ensuring economic growth is not stifled.

With the Monetary Policy Committee (MPC) meeting scheduled for this week, analysts predict a tough decision on whether to raise interest rates to curb inflation or maintain the current rate to support credit availability and investment.

Recent data from the National Bureau of Statistics (NBS) reveals that Nigeria’s inflation rate remains elevated, despite recent policy measures to control it.

In January 2025, the country’s headline inflation rate dropped to 24.48% year-on-year, following the rebasing of the Consumer Price Index (CPI).

However, in December 2024, inflation was recorded at 34.80%, indicating a sharp decline due to methodological adjustments.

Despite the reported drop, rising food prices, exchange rate volatility, and high energy costs continue to exert pressure on consumer purchasing power.

The CBN has raised interest rates six consecutive times in 2024, with the Monetary Policy Rate (MPR) currently at 27.50%—a measure aimed at reducing excess liquidity in the system and curbing inflationary pressures.

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However, there are growing concerns that further rate hikes could slow down economic growth, increase borrowing costs for businesses, and negatively impact job creation.

Further Interest Rate Hike – A move that could help reduce inflation but might also hinder economic growth and increase the cost of credit for businesses and consumers.

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Maintain the Current Rate – Allowing the effects of previous hikes to settle, while closely monitoring inflation trends and market reactions.

Reduce Interest Rates – A less likely option, as it could worsen inflationary pressures by increasing money supply and consumer spending.

The Naira has continued to experience volatility in the foreign exchange (FX) market, with pressure mounting due to:

A tightening monetary policy stance—such as an interest rate hike—could help stabilize the Naira by attracting foreign investors, but it may also have negative consequences for local businesses and credit markets.

Amid these challenges, stakeholders such as the Centre for the Promotion of Private Enterprise (CPPE) have urged the CBN to pause interest rate hikes and focus on alternative fiscal measures to tackle inflation.

Dr. Muda Yusuf, CEO of CPPE, emphasized that inflation in Nigeria is largely driven by structural issues, not just monetary factors.

“Rather than continuously increasing interest rates, the government must address core issues such as exchange rate stability, agricultural productivity, and energy costs,” Yusuf stated.

Experts argue that monetary policy alone cannot resolve Nigeria’s inflation crisis. The government must implement complementary fiscal policies.

With the MPC meeting scheduled for this week, the CBN’s decision will be crucial in shaping Nigeria’s economic trajectory for 2025.

If the CBN tightens monetary policy further, Nigerians could see higher borrowing costs, a slowdown in credit expansion, and reduced consumer spending.

On the other hand, if rates remain unchanged, inflation could persist, further weakening the Naira and increasing the cost of living.

The CBN’s policy decision this week will be a defining moment in Nigeria’s economic landscape. While the fight against inflation remains a priority, the need for economic stability and growth presents a complex challenge for the apex bank.

As Nigerians await the MPC’s resolution, one thing remains clear—the CBN must strike a delicate balance between inflation control and sustaining economic growth.

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